At some point, when money for basic needs is no longer an issue, we begin to think of how to multiply what we have by making strategic investments, and many go after the stock market. From the industry and investor point of view, the stock market is absolutely important as it plays a pivotal role in the growth of industry and commerce in every country, hence the close watch it receives from governments and central banks worldwide.

The stock market has become the primary source for companies to raise funds for business expansions via Initial Public Offerings (IPOs). This is done by offering shares to the public in exchange for their investments which becomes funding for further expansion. To be able to engage in this process, the company has to be listed on the stock exchange first of all, and this is how this core function of the stock market has become fundamental in spurring commerce in every country.

As a secondary role, the stock market provides a common platform or level playing field for the buyers and sellers of stocks that are listed on the market. Thus, understanding how prices on the stock market are determined is important for every business-savvy individual and forward thinking enterprise.

The price dynamics on the stock market are driven by exogenous factors centred around demand and supply, the same fundamental players in basic economics. So, you can only buy a stock at a certain price if there is a willing seller for that price, and this can be irrespective of whatever price is contained in the pricelist. If more people want to buy a stock than sell it, the price moves up and vice versa.

So a key driver of stock prices will be people, the very players in the market. Positive and negative news surrounding companies can translate into shifts in stock prices depending on how people interpret and respond to the news. So, the price of a particular stock is a representation of multiple things; recent news from or about the company, the company’s current value, and the growth investors expect in the future.

In the Nigerian Stock Exchange (NSE), the closing price is determined by the exchange’s engines; but there is an underlying principle, a share can only register a price change if there is a single buyer of at least 50,000 units. Given this understanding, the key take away here is that pricelists are only a guide and should be used as such. These lists are very dynamic, and may not be a true reflection of share prices.

By Emmanuel Iruobe