What is the formula for determining the price of shares? How share price is determined? For each share, there are three prices:
– Nominal, that is fixed in the company statutes and printed on the share’s form (if it is a physical form). This is the price of a formal nature.
– Issue, ie the price at which shares are sold in the course of emissions (primary market). The issue price is different from the nominal value. In many countries, there are laws forbidding that the issue price was lower than the nominal price. In general it is higher.
– Listed, that is the price that shares obtain while traded on the stock market (secondary market). This price is crucial. The daily trading price of shares is an exchange rate.
Nominal price of shares is calculated by dividing the share capital and number of shares. The issue price of the shares is determined by taking into account the perspective of the company and estimated profits. The exchange rate is set by the market. This is the most important price.
Formulas for determining the share price are different. However, they can be systematized in the approximate extent. In general, there are two formulas for determining the share price:
– Fixing – single price system. Share price is determined only once on a given trading session and is invariant in the course of the session. For there to establish such an exchange rate, all buy and sell orders must be collected at a given moment, so that it could be possible, as a result of the confrontation of orders, to provide an optimal rate. There are different variations of the fixing formula. In Europe, the current exchange rate on the trading session is defined by “par Cassier.” This means that the orders are compiled (on the order book) and above all, taking into account the principle of maximum exchange trade, applicable rate during the session is determined. Optimal exchange rate is the rate at which trading of securities is the highest possible. This is a basic rule for determining the exchange rate. Another variation of fixing is “a la criee”, which means that at the moment of the trading session there is only one share traded. This is similar in principle to auction.
Fixing is used on the stock exchanges of the weak and unbalanced trading. This way fixed rate in such markets provides a quite smooth transaction. Exchange rates set with this system are called fixed rates (unitary).
– Continuous trading system. Rate of asset determined by this formula is changed during the session, depending on the evolution of supply and demand. There is no need to collect orders for a specified moment. Orders are executed on a regular basis. Rates determined in this system are called current, variable, liquid or moving rates.
There are markets where both formulas of fixed and variable exchange rates are used in parallel. In this case, the method of fixing the exchange rate for shares is determined by the frequency of these assets’ transactions. If this periodicity is high and the turnover of assets is high then the formula of variable rate is valid. And that’s how price of shares is determined.