How are stock prices determined on the stock exchange?

In theory, the value of a security (stock prices) is measured by the present value of the future total return that can be expected, the estimated value of the dividends or coupons that we will receive during the entire holding period plus the capital gain or loss on sale that will be resold. This includes discounting future returns and analyzing factors that may affect the returns of the securities. Topic Contents Toggle What determines stock prices? General factors Economic and political environment: Interest rates: If interest rates rise: Rising bond prices make bonds cheaper: Stock price changes can have contradictory effects: Title Analysis PER (Price Earnings Ratio): Placing orders on the stock market Different possible execution modes What causes stock prices to fluctuate?

The law of supply and demand is easy to understand. Company Value Company Profit What determines stock prices? There are general factors and security-specific factors as follows: General factors They are many, and it is not always easy to predict, isolate, or analyze them, but we can identify some things that have a clear impact on the stock market, including: Economic and political environment: The strong growth of stock prices, especially in the United States, and the calm political situation, are all factors of stability and demand in stock markets. For example, if there is growth, corporate profits are supposed to increase, which affects stock prices.

Interest rates: Short rates, set by central banks (to fight inflation, down to promote growth), influence long rates, which set the rate at which companies can borrow. When interest rates rise, the price of fixed-rate bonds falls and vice versa.

why ?

Because if prices rise, old bonds, which serve less interest, become less attractive, and find buyers in the market only if their price falls. If interest rates rise: New bonds will be issued at a higher rate of 5%. For example, the buyer of the old bond will demand that this bond fetch him the same. The adjustment will be made according to the price of the bond, which will be in his interest to buy it only if it is worth the “coupon value / new interest rate, i.e. in our example 9 / 0.05 = 180 euros.

Higher bond prices make bonds cheaper: shareholders can arbitrate in favor of bonds, sell their shares, and thus their price falls. But once stock prices fall too much, they become more profitable, which again encourages the purchase of shares and causes their price to rise. Stock price changes can have paradoxical effects: if households expect an increase in prices, they may tend to consume more, fearing higher prices in the future, and thus save less. On the contrary, if they want to preserve the value of their wealth, they are encouraged to save more in taxes on convertible securities instead on the distribution, within convertible securities, between stocks and bonds.

Read also: How are exchange rates calculated and what is the cross of common currencies Title Analysis Some analysts believe that lessons can be learned from past trends and that a security will always tend to follow the same type of trend. They create charts and identify high points, low points. This is called chart analysis. A more widespread method (which is only possible if there is an introduction in the market) is the so-called fundamental analysis, which takes into account the characteristics of the issuer (another name for the company that issues stock quotes). PER (Price Earnings Ratio): It is the ratio between stock prices and expected earnings extracted from fundamental analysis.

It allows you to compare companies in the same sector, and determine whether a stock is expensive or not as financial analysts use several other methods. If it is a question of analyzing a company in order to buy its bonds, the analysis is instead about its ability to repay its debts which are evaluated by rating agencies, such as Moody’s, Fitch or Standard & Poor’s, which classify companies according to their risk (from the best, AAA, to the worst, CCC or even D) as the evaluation of the price of bonds is relatively complex and reserved for specialists. Here consider more complex concepts such as sensitivity, which measures the variation in a bond's price in relation to a change in the interest rate.

Placement of orders on the stock market In addition to the fact that investors' orders, if they wish, can be executed somewhere other than the regulated market, the new rules introduce the new and fundamental concept of “best execution” of orders, which obliges the investment service provider (financial intermediary) to take into account a series of criteria to ensure that it obtains the best possible result when executing the orders of its clients. In this context, each investment service provider must implement its own order execution policy (how orders are executed, and where orders are executed it has specified), which will be subject to the client agreement and whose effectiveness must be monitored. The new texts also significantly strengthen the information obligations of investment service providers towards their clients, as investors enjoy the same degree of protection whether they choose a local or foreign service provider.

Different Execution Modes Possible There are three execution modes or three types of places where orders to buy or sell financial instruments can be executed: Regulated Markets: Regulated markets are traditional exchanges, such as Euronext. Multilateral Trading Systems: These are groups of investment service providers that compete directly with regulated markets. There are 9 multilateral trading systems approved in France by the Autorité des Marchés Financiers (AMF), including Alternext and Free Market. Investment service providers act through systematic overlapping: This function consists of the investment service provider intervening between its buying and selling clients, by systematically acting as a counterparty to the buy and sell orders of its clients. In other words, the buyer does not buy directly from the seller, as is the case in the traditional system in place, but from the broker who himself buys the corresponding securities from another of his clients. This is the English “book” system and only the balance of orders that do not find a counterpart in this internal system are placed on the market.

What causes stock price volatility? Stock prices change on a daily basis under the pressure of market forces, i.e. according to supply and demand. If there are more people willing to buy a security (demand) than to sell it (bid), the price rises.

Conversely, if the number of people looking to sell that security is higher than the number of people looking to buy it, supply is greater than demand and prices are lower. The law of supply and demand is easy to understand. What is difficult to understand is why people want to buy or sell a particular security. This amounts to determining what is good or bad news for the company. The answers to this question are many, because every investor has his own ideas and strategies when it comes to determining what level.

Company Value The main theory is that the movement of market prices indicates the value that investors attribute to a company. However, the value of a company should not be confused with its price. The value of a company is its market capitalization, which is the stock price multiplied by the number of shares outstanding. Therefore, a company's 1,000 shares priced at $100 ($100,000) have a higher market value than 100 shares worth $500 ($50,000). To complicate matters further, the stock price reflects not only the current value of the company, but also the growth expected by investors.

Company Profit The most important factor affecting a company's value is its profits. Companies with outstanding shares (public companies) are required to report their profits 4 times a year (every quarter). Stock markets pay close attention to these quarterly data, because analysts base the future value of companies on earnings expectations. If A's results are higher than expected, its stock price jumps. If they are lower than expected, the price falls.