Who Decides the Price/Value of Shares in the Share Market?

During market hours, share prices fluctuate constantly. Once the market closes, prices stay fixed until it reopens. So what actually drives these constant changes, and what determines a share’s value in the first place?

The Demand & Supply Rule

The basic principle: when something is in high demand but limited supply, its price rises. When supply outpaces demand, the price falls. Share prices follow the same logic.

Here’s how it plays out in practice: as a share’s price rises, existing holders start selling to lock in profits. If enough people sell at once, demand dries up and the price falls — sometimes down toward what’s considered the share’s intrinsic value, or even below it.

(More on how to calculate a share’s intrinsic value in a future article.)

At that lower price, buyers see an opportunity — the share looks cheap relative to its underlying value — and start buying in. Demand rises again, pushing the price back up, until profit-taking kicks in once more and the cycle repeats.

This is also, in essence, how disciplined investors operate: buying when a share is undervalued, and selling into strength. Every buy or sell order placed in the market nudges the price in some direction — that’s the mechanism in its simplest form.

Company Reputation, Position & Public Sentiment

A company with a poor reputation will struggle to attract investors. Even an offhand comment from a well-known public figure can move a stock’s price today, for better or worse.

Customer sentiment matters too — a wave of negative reviews signals weaker future sales, which investors read as a warning sign. A company’s financial position (its debt load, in particular) is another factor investors weigh, alongside general news flow surrounding the business.

Company Performance — Past, Present & Future

Investors look closely at a company’s track record: balance sheets, cash flow statements, and historical earnings all inform whether the business has consistently generated profit.

They also look forward — assessing future plans, how newly raised capital will be deployed, and whether the company looks like a better fit for long-term or short-term investment.

→ Related: Long Term vs. Short Term Investments(#7)

Who Sets the Share Price During an IPO?

When a company lists on the market for the first time, its own owners (with guidance from underwriters) set the initial price — calculated based on the company’s overall valuation, divided across the number of shares being offered.

→ Related: What Is a DRHP/RHP?(#3)

Who Sets the Price When an Already-Listed Company Issues More Shares?

Once a company has completed its IPO, it becomes a “listed company” and may choose to issue additional shares later on. This time, the company doesn’t set the price directly — since every existing share is priced identically, the current market price determines the value of any newly issued shares.

Number of Shares Issued

This factor gets less attention than it deserves, but it plays a direct role in shaping a share’s price.

A simple analogy: think of a cake. The size of the cake represents the company’s total value — how many slices you cut it into is a separate decision. Cut more slices, and each one is smaller; cut fewer, and each is bigger. Either way, the cake itself is exactly the same size.

The same logic applies to shares. Say a company is valued at $10 million and issues 100,000 shares — each would be priced at $100. If that same company instead issued 200,000 shares, each would be priced at $50. The number of shares changes; the company’s total value (its market capitalization) does not.

This applies whether it’s an IPO or an already-listed company issuing new shares.

Inflation & Broader Economic Factors

Rising inflation tends to put downward pressure on the share market, while easing inflation tends to support it. The general logic: as inflation erodes purchasing power, consumers pull back on spending, company earnings come under pressure, and investors grow more cautious as a result.

→ Related: What Is Inflation? What Causes It?(#28)

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Recap

Share prices move based on a combination of factors: basic demand and supply dynamics, a company’s reputation and current standing, its historical and projected performance, how its shares were initially priced (or repriced) on issuance, the total number of shares outstanding, and broader economic conditions like inflation.

What other factors do you think shape share prices today? Let us know.