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What determines the price of shares?

If you look on the Australian Securities Exchange website, you’ll see that shares can range in price from just a few cents, to a few hundred dollars. But just because one share in a company looks cheap on the surface, doesn’t mean you should buy it. What a share is worth cannot be determined by its price alone.

Because each company has a different number of outstanding shares, the share price doesn’t give us a clue as to the value of the company. For that figure, we need the market capitalisation number. You can calculate a company’s market capitalisation (it’s total value) by multiplying the stock price with the number of shares available for sale.

Who determines the price of shares?

The stock price of a company is initially calculated when it goes from being privately to publicly owned. This usually happens because the company wants to expand and they can do this by seeking money from members of the public via an initial public offering (IPO).

Before being sold to the public, an investment bank values the company to determine how many shares will be offered and at what price.

Why are some shares “cheap” and others “expensive”?

If the investment bank thinks the company is valued at say, $100 million dollars, the company might decide to issue 10 million shares at $10 each, or perhaps 50 million shares at $2 each.

Once the company goes public and starts trading on an exchange (like the ASX), supply and demand take over. Shares that investors really want will be in high demand, and prices should increase, but shares with less demand will likely decrease.