Understanding a Stock's Share Price
Share Prices Defined:
A share price is the attached price to denote the tangible value for which a stock is purchased and sold in a market setting. The prices of shares will fluctuate based on the supply and demand of the stock—if there are more buyers in a market for a particular stock, the underlying share price will go up and vice versa.
In the United States, a stock’s share price must be valued at $1 or more to be traded in the primary markets, such as the NASDAQ. If the share price falls below this level, the stock will be “delisted” and become an over the counter stock (OTC). To be listed on the major exchanges a stock must have a share price of $1 or more for 10 consecutive trading days during every month of the fiscal year to remain listed.
The majority of public companies in the United States aim to keep their share price (commonly referred to as stock price) low and based on round lot (multiples of 100 shares) trading. Publicly traded companies can adjust their share prices by issuing a stock split.
This strategy effectively substitutes a quantity of shares at one price for a different quantity of shares at a price adjusted to where the value of share prices remains equivalent. For example, if a company undergoes a stock split of, 500 shares priced at $24 may become 1000 shares priced at $16. A large number of U.S. companies prefer to keep their share prices within the $25-100 price range.
Initial Public Offerings
The share price denotes the overall value placed on a company’s stock. Publicly held companies will sell shares of stock to increase their capital reserves through investments in equity. The share price is originally determined when a private company embarks on a process known as an initial public offering to transform their business into a public company.
A team of financial services underwriters and investment banks will place an initial share price on the newly-formed public company based on current market conditions and the company’s financial position and impact. After the issuance of the initial offering, the company’s stock price will fluctuate based on the demand for the company’s stock.
Determining the initial share price of a company’s stock is a complicated process that requires an in-depth review of past stock issues for similar companies and a thorough review of current market conditions. Following an evaluation of this information, the underwriter will institute a price range for the shares of the company; such a range offers potential buyers an idea as to how much they will pay for the investment. If high demand is forecasted for the issuance of the company, the share price will increase through the day of issuance.
Although the share price listed on the stock exchange represents the company’s market price at which investors will conduct transactions for the stock, it does not represent the book value of the company’s shares.
Share prices are also viewed based on the price multiple at which the stock is valued. A basic formula to observe this figure is to determine the price to earnings ratio of the company, which is the market price of one share divided by the earnings per share.