- Who sets the price of the shares of stock
trading in the stock market?
Well, consider these related questions.
Who sets the price of a gallon of milk?
Who sets the price of a gallon of gasoline?
Who sets the selling price of a house?
The answer to all these questions is that
no one sets the price in the market.
Instead, the price arises from the interactions
of the buyers and sellers in the market.
If the price is too low, buyers will flood the market.
Sellers will quickly sense this
and will insist on a higher price.
If the price is too high, sellers will flood the market
and buyers will be able to be choosy.
They won't buy unless prices are lowered.
The human interactions in the market
aggregate all information available
until both the sellers and the buyers
agree that the price fairly reflects that information.
That is how the prices of milk, gasoline, houses,
children's clothing, and every other price
is determined in a freely functioning market.
In the case of prices of shares of stock,
the process is exactly the same.
When both a seller and a buyer
consider the share price to be fair,
given the available information, they trade.
That trading price is then considered to be
the market share price at that moment.
So, what causes share prices to change?
Well, new information changes the share price.
New information about future sales
and net income of the company,
new information about overall economic trends,
new information about industry-related events,
and new information about political stability
and investor confidence.
All of this new information is considered
by potential buyers and sellers
and is then quickly impounded into the share price,
causing the price to go up if the news is good
and down if the news is bad.
This process of assimilating new information
happens pretty fast in active markets.
For example, for companies traded
on the New York Stock Exchange or the NASDAQ,
any new information is reflected in prices
in just a few minutes.
One benefit of being publicly listed
is that it's easier to raise capital when you're public.
You can issue shares in exchange for cash
to investors all over the world.
In addition, if your shares are traded publicly,
there is a liquid market for shareholders
to sell their shares.
For example, employees who have received shares
as part of their compensation
can easily exchange those shares for cash.
Another benefit of being publicly traded is
if there's a boost to the company's reputation,
when it has decided to expose itself
to constant public scrutiny,
in order to survive that scrutiny,
a company is probably better than average.
There are benefits associated with going public,
but there are costs as well.
If your shares are publicly traded,
you are subject to increased regulation.
There are government agencies
who are following your company.
There are financial reports you have to submit
that then become public information.
If you are publicly traded,
there are a lot of impatient people watching you.
You may no longer be able to take the long-term view.
Your planning horizon might not stretch
beyond next quarter's earnings report.
Now, another cost of going public
is that the founders can lose control of their company.
The new shareholders may have different ideas
about how the company should be run.
So, there are benefits and there are costs
associated with being a publicly traded company.
The vast majority of companies in the world
are not publicly traded.
For example, in the United States,
there are about 4,000 companies that are publicly traded
and about 15 million companies that are not.