Understanding the price of a stock: a practical guide to calculating its market value

When we delve into the stock market universe, one of the first concepts we encounter is the price of a share. However, many investors do not truly understand what lies behind that figure blinking on their broker’s screen. Market value is not a magic number, but the result of a complex mechanism where buyers and sellers converge in search of equilibrium.

The fundamental basis: supply, demand, and consensus

To understand how a share price is calculated, we must first go back to an elementary economic principle. Imagine a primitive society where barter prevails: sacks of wheat for a cow, a certain number of tools for a fabric. This system works initially but generates chaos when interests do not align or when exchange volumes vary.

The solution came with currency, which allowed assigning a unit value to each good. But it was the Law of Supply and Demand that perfected this mechanism, establishing that the price of any asset is determined by what buyers are willing to pay versus what sellers are willing to accept.

In the stock market context, the price of a share works exactly like this. There is no secret formula or entity arbitrarily setting it. It is the market itself, through millions of daily transactions, that establishes the consensus. This consensus is what we call market value.

Practical formula: how to calculate a share price

While it is true that the price of a share appears automatically on trading platforms, understanding its origin is fundamental. The relationship between market capitalization and unit price is direct:

Market Capitalization = Share Price × Total Number of Shares

Rearranging the formula to find the individual price:

Share Price = Market Capitalization ÷ Total Number of Shares

This simple operation reveals an important truth: the price of a share does not exist in isolation but is part of an ecosystem where the total value of the company is distributed among all its outstanding shares.

Bid, Ask, and Spread: the reality of calculation

When operating in real markets, we discover that the price of a share is not a single point but a range. Brokers present two prices simultaneously:

• Bid (Buy Offer): price at which we can sell our shares
• Ask (Sell Offer): price at which we can buy shares

The difference between them is known as the spread, which represents the implicit commission of the intermediary. This concept is essential to understand how the actual price we pay or receive in each transaction is calculated.

The ability to set prices: limited power

A logical question arises: can we ourselves set the price of a share we want to buy or sell?

Technically yes, but reality is more restrictive. If a share trades at 16 euros and we offer 34 euros, it is unlikely to find a counterparty willing to sell at our demanded price. Conversely, if we offer 12 euros for a share worth 16, sellers will hardly accept our proposal.

The price of a share acts as a compass guiding negotiations. Deviating significantly from it can result in unfulfilled orders or unviable commercial situations. This self-regulating mechanism is what maintains the relative efficiency of markets.

Liquidity: the decisive factor in price determination

Liquidity is the element that determines whether a share’s price is established transparently or if we face market anomalies. When trading volume is low, problematic situations can occur:

• Orders do not cross and transactions are not executed
• Sellers with excessive expectations achieve their goals
• Aggressive buyers obtain unjustified gains due to low volume

Actions like BBVA enjoy immediate liquidity, while medium-sized companies face difficulties finding counterparts. In more sophisticated assets (private equity, unlisted debt), liquidity virtually disappears, making the very concept of “market price” fade away.

Primary vs. secondary markets: where the price is calculated

The price of a share we observe comes from the secondary market. In the primary market, companies issue securities to the public, and the money goes directly to the issuer. It is an issuance market where initial prices are set.

Subsequently, investors trade these “used” securities in the secondary market, where the share price fluctuates according to real supply and demand, reflecting the market’s valuation of the company at each moment.

Market capitalization: the other side of the coin

The price of a share is inextricably linked to market capitalization. Knowing one allows calculating the other. Market capitalization represents the total value the market assigns to the entire company.

If a company has 100 million shares and each trades at 50 euros, its capitalization will be 5,000 million euros. This number, which may seem academic, has profound implications for investors.

Three different valuation methods: nominal, book, and market

It is crucial to distinguish among three different values that are often confused:

Nominal value: the initial issuance price dividing the share capital by the issued shares. It serves as a historical reference but quickly loses relevance.

Book net value: reflects the company’s net equity according to its accounting books. Value investing-focused investors use it as a tool to detect opportunities, assuming that time will correct deviations from the market price.

Market value: the actual convergence of buying and selling forces. When both forces are equal, the price stabilizes; when one dominates, the price moves.

Questionable efficiency: bubbles and distortions

The price of a share, although functioning as a value discovery mechanism, is far from perfect. Often, prices become completely detached from business reality, driven by speculative trends rather than solid fundamentals.

The case of Terra in Spain exemplifies this distortion: it traded at 11.81 euros and in less than a year reached 157.60 euros, only to disappear years later after being absorbed by its parent company. The price had soared to stratospheric heights without real justification.

Gowex is another iconic case: it presented itself as a global Wi-Fi provider with spectacular results. When external analyses revealed the deception, the share price collapsed. Hundreds of thousands of investors discovered that the price they saw on screen reflected no real value, only collective illusion.

These examples demonstrate that a share’s price can deviate dramatically from its intrinsic value, especially when speculation dominates over fundamental analysis.

Current context: from growth to value

In recent decades, share prices, particularly in technology and biotechnology, were driven by future growth models (growth). The abundant money from central banks fueled prices based on promises, not current results.

This paradigm is reversing. The market now seeks companies with consistent revenue streams, controlled expenses, and proven profitability. The share price is beginning to reflect again value factors: present financial solidity, not speculation about future profits.

Conclusion: beyond the number on the screen

The price of a share is simultaneously simple and complex. Mathematically, dividing market capitalization by outstanding shares gives the answer. Economically, it represents the consensus of millions of participants. Psychologically, it reflects hopes, fears, and human irrationalities.

To invest properly, knowing the calculation formula is not enough. It is essential to understand that the share price is dynamic, that liquidity is vital, that bubbles are inevitable, and that time reveals the true nature of things. Only then can we navigate markets with greater clarity and purpose.