Why Are Some Stock Prices So High?

There are many theories that try to explain and justify the reasons for stock prices. What then causes such disparity in the price of their stocks? What makes one stock so expensive and the other cheap?

Have you ever wondered why some stocks trade so high while others trade low? Diamond Bank for example trades at N2.94, while the likes of Nestle are currently trading at N1,360. What makes one stock so expensive and the other cheap? What causes such disparity in the price of these stocks? 

Stock prices are calculated when a company goes public. Typically, when a company makes an initial public offering, its investment and finance team finds its value using complex valuation techniques. The results determine how many shares will be offered, and at what price it will be issued to the public.
The prices set at this valuation stage often determine by far, the money price of a stock and how high or low it can trade post -IPO. A ready example is Seplat.

The market is  driven largely by supply and demand.When a stock is sold, a buyer and seller exchange money for share ownership. The price for which the stock is purchased becomes the new market price.The more demand for that stock, the higher it drives the price. The more the supply of a stock, the lower the price.

Think of the stock market like a big store during the festive period where people are desperately trying to get gifts for their loved ones. If there are more buyers than sellers, the price of that item will skyrocket and then you will have to pay more to purchase such. If Nestle’s stock is in high demand, the price automatically shoots up. If the company's future growth potential doesn't look good, sellers of the stock could drive down its price.

Company earnings also influence stock price by changing market perceptions and investor confidence of the stock. Companies issue quarterly earning reports that reveal its profits as measured per share. Before earnings are released, analysts would have put out estimates of what they believe the company earnings will be, based on company guidance, market conditions and management performance. Positive earning reports help increase a stock's value even if the company doesn't offer a dividend to shareholders.

Publicly traded companies typically report earnings about three weeks after each quarter and stock prices generally rise when companies meet or exceed published estimates.  Buyers are usually willing to pay a premium for companies that can demonstrate above average earnings growth and cash flow. If a company performs below expectation, the market ensures that the stock price is drastically reduced by half of its initial price or even lower.

There are many theories that try to explain and justify the reasons for stock prices. Basic human emotion as greed and fear also affect stock prices, just as rumors of impending doom or liquidation bring a significant drop to the value and price of a stock.