subject: Factors That Determine Share Prices [print this page] Stock trading in India consists of a network of buyers and sellers. NSE (National Stock Exchange) and BSE (Bombay Stock Exchange) in the Indian stock market are the places where major trading occurs. BSE has around 4500 firms listed with 10% of the firms enjoying more than 90% market capitalization. NSE on the other hand comprises about 1200 companies.
Determination of Scrip Prices
Once a company goes public by offering an initial public offering (IPO), a base value of the share is calculated. What determines share prices? There is no mathematical formula for calculating this. The current and projected value of the IPO is usually assessed by an investment bank. The bank may look at the present value of expected future earnings and set a price that investors are willing to pay.
Ultimately, it is the price where supply and demand meets. More fundamentally though, the price that a share is traded for is a function of a variety of factors. The theory of supply and demand makes prices fluctuate. Some of the technicalities that affect these are:
Inflation: The value of returns on investment is reduced when the rate of inflation goes up. Investors pay more for less. Consumer spending, rates of employment, government policies are altered. It sure appears as if stock prices and inflation are inversely proportional to each other.
Interpretation of any global news: Positive news in general raises the market returns. For instance, excellent financial results of a company attract investment and prices of shares go up. Negative news about one stock of a given sector can affect the movement of stock of another firm.
In addition, company acquisitions, political happenings, opening of new markets, foreign direct investment, lawsuits against companies, etc. have a direct bearing on the stock market.
Stock Trading Tips
One needs a proper understanding of the strategies for getting returns on investment. Trend identification is a key to making consistent money making in the market.
Having of know-how of the world economy helps. Prices escalate when there is positive news with regard to GDP of the economy.
P/E ratio is the ratio of market price of a share to the earnings per share and indicates the efficiency of a company in converting the invested money to profit earnings. In isolation, it is not of much benefit. However, a comparison of the ratio between two companies in the same industry can be a useful tool.
Being aware of the market situations on a routine basis is a good exercise. BSE and NSE are the two most used stock exchanges in India and are barometers of the economy whose live feeds today are easily available on handheld devices.
Several factors determine share prices on the Indian stock exchanges. This article looks into some of these and tips related to gauging prices while investing
