How is a stock's price determined?

Every stock has two prices at any moment:

• The bid. The highest price any buyer is offering right now.
• The ask. The lowest price any seller will take right now.

Say a made-up stock has a bid of $49.95 and an ask of $50.00. You want to buy now, so you pay the ask: $50.00. That trade becomes the new price on your screen.

If lots of buyers keep paying the ask, sellers raise what they'll take, and the price climbs. If lots of sellers keep taking the bid, buyers lower what they'll pay, and the price falls. This happens thousands of times a day, and the exchange only matches the orders. It doesn't pick the price.

Where the first price comes from

Before a company lists, there's no trading, so there's no price. In an IPO, the company and its bankers pick a starting price by asking big investors what they'd pay. From the first trade on, buyers and sellers take over.

The price moves when people's view of the company changes, or their mood does. The usual causes:

• Earnings. A company reports profits every quarter. If they beat what people expected, buyers pay more. If they miss, sellers rush out.
• News, like a new product, a lawsuit, a new boss or a big contract.
• Interest rates. When safe savings pay more, stocks have to compete harder for your money.
• The mood of the whole market. In a panic, people sell good companies along with bad ones.
• Big funds. One large fund selling a big block of shares can push the price down for days.

Some of these change what the business is worth. Many only change the mood. Costco's numbers below show the difference.

Costco's earnings per share went up every year from fiscal 2016 to fiscal 2026.

In fiscal 2022, its earnings per share rose from $11.27 to $13.14. That same year, the stock fell from $608.05 on April 7 to $416.43 on May 20, a drop of nearly a third in six weeks.

The business didn't lose a third of its value in six weeks, and its profits kept rising that year. The mood of the buyers and sellers changed, and the price went with it.

Earnings per share grew almost four times, about 15% a year. The price grew almost six times, about 19% a year.

So most of the rise came from the business earning more. The rest came from buyers paying more for each dollar of earnings: 31 times earnings in 2016, 46 times in 2026. That second part depends on mood, and it can shrink as easily as it grew.

Warren Buffett often repeats a line from his teacher, Benjamin Graham: in the short run, the market is a voting machine. In the long run, it's a weighing machine. The votes are this week's buying and selling. The weight is what the business earns, and over years it wins.

The price is what you pay. The value is what the business is worth to an owner, based on what it will earn.

Most days the two are close. Sometimes buyers get excited and the price runs far above value. Sometimes they panic and it drops far below. Nobody can tell you which way it goes next week.

What you can do is estimate the value yourself, then wait for the price to come to you. What is intrinsic value? explains how to estimate it. The margin of safety guide explains how far below it to buy. What price to pay for a stock turns both into one buy-below price.

Market cap is the price of the whole company.

Market cap = share price × shares outstanding

A made-up company with 20 million shares at $50 each has a market cap of $1 billion.

For a real one: Costco had 443,129,349 shares outstanding on September 29, 2026, according to its annual report. Its stock closed at $924.59 that day. Market cap: about $410 billion.

You'll find the share count on the front page of the annual report, or on any stock quote page.

Why a share price alone tells you little

A $1,000 share isn't automatically more expensive than a $10 share. It depends how many shares the company has, and how much it earns for each one. That's why investors compare the price to earnings per share (the P/E ratio), or to book value per share. How to calculate book value covers the second one.

Market cap is set by the same buyers and sellers as the share price. So it tells you what the company costs today, not what it's worth.

Estimating value by hand means ten years of numbers for every company you follow, and then checking prices every day.

Wonderfolio estimates fair value from each company's own ten-year record. It derives buy, watch and sell zones from that fair value and flags when a price crosses into a buy zone. The decision stays with you.

Want to see it for one company? The free report runs a US or Canadian stock of your choice. Or try the free calculators.