Prices are determined by the market. There is a financial theory called the Efficient Market Theory. According to this theory, all public information is immediately priced into the market. If a drug company is getting approval from the FDA for a drug, then the market will adjust “immediately”. If a company loses a court case that will cost millions, the market adjusts “immediately”. Mainly, investors that want to buy a stock have a price, above which, they will not buy the stock, and investors that want to sell a stock, below which, they will not sell the stock. Most of the time these prices get worked out as a bid/ask price.

There are many different ways to measure the value of a company. These ways currently fall into two main categories. They are Fundamental Analysis or Technical Analysis.

Fundamental Analysis uses the information about the company, the market, the economy and the competition. One of the main starting points in this analysis is the Capital Asset Pricing Model (CAPM). This model estimates future earnings, based on current earnings and growth rates and the discounts these earnings into todays dollars. Key assumptions that need to be made, that can affect the validity of the calculation, are growth rates, interest rates, inflation rates, future costs, etc.

Technical Analysis uses market information to predict future price moves. Practitioners of this analysis are sometimes called chartists. They do not care about the specific company. They look for specific patterns in the trading data (price movements, volume, etc.) that gives them an indication of the future direction of the price of the stock.

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