How are stock prices calculated?

In order to determine whether a company will provide a profitable stock return, a number of things should be taken into consideration. The company's management, services, products, financial situation, prices, and popularity all play a role in the outcome of its stock. Determining the prices of stock is not an easy thing and is calculated via a number of different calculations.

When first calculating stock prices, there are several things to take into consideration. The first determining factor is the EPS. This stands for Earnings per Share and indicates how profitable a company or organization is. This number is calculated by subtracting the dividends of a certain stock from the company's net income, and then dividing that number by the number of outstanding shares. This is probably the most important factor in determining the price of a share of stock.

There are a couple of other factors in determining the EPS, one of which is preferred dividends. This is the distribution of a portion of the company's earnings, and the figure shown is generally the dollar amount that each share receives once it is sold or traded.

Here's an example of determining the Earnings per Share: say a company has a net income of $25 million. If the company then paid out $1 million in preferred dividends and had 10 million shares for one half of the year and 15 million shares for the other half, then the EPS would be $1.92 (24/12.5). By breaking it down, we see the $1 million is first deducted from the net income to get $24 million. Then a weighted average is taken to find the number of shares that are outstanding (0.5 x 10M+ 0.5 x 15M = 12.5M).

Some other important factors in determining how to calculate stock prices are the Price to Earnings Ratio, which indicate the market value of the stock. It is calculated by dividing the stock's closing price by its earnings per share. Another useful figure is the P/S. This number indicates the Price to Sales ratio and is figured by dividing the closing stock price by the revenues per share.

Calculating stock prices is done at the close and open of the market each day. However, it is important to note that this price is not always the same as the company's closing price the night before; after-hours trading as well as the time company news is released can affect the opening price of the stock the next day. After-market trading occurs when investors trade stocks and bonds on the market after the normal business hours of 9:30 am to 4:00 pm Eastern Time. Oftentimes, the activity of buying and selling during after hours trading can either lower or raise the stock's opening price the next day. These price fluctuations are especially true for stocks that have limited trading activities. In addition, the prices of certain stocks during after-market trading are generally not reflective of the stocks' regular prices for a number of reasons. This results in having to calculate and update the stocks' prices.

Through mathematical equations and a great deal of research and study of companies and their profitability, stock prices are calculated and published for investors, brokers, and the public.