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Understanding stock prices

There are a myriad of factors that determine the price of stock on a securities market. It is important for investors to understand how the price of a stock is arrived at so they can make informed decisions on their investment portfolios. A number of factors determine the constantly changing price of a security.

The Initial Public Offering price per share and the actual mechanics of what happens may be considered complicated, but the basic idea is simple economics: the price is set as the number which balances supply and demand.

Specialists such as financial analysts, fund managers and securities dealers carry out calculations and valuations to determine the initial or opening price of a share when it gets listed on a stock exchange.

The secondary market on FINSEC functions like an auction meaning buyers and sellers of securities are lining up on either side for a potential trade, one party willing to buy and the other willing to sell its ownership. When the two agree on a price, a trade is matched and that becomes the new market quotation.

Stock Exchanges that operate sophisticated systems such as the FINSEC Automated Trading System, track security prices in real time and every time there is a trade the volume-weighted-price of that stock is recalculated. This recalculation also gives a revised market capitalisation of that particular stock as well as that of the entire market.

There are other events that also affect securities prices. Some of these events include but are not limited to performance of the industry in which the company operates in. Any positive sentiments within a particular industry tend to push demand for stocks in companies that operate in that industry and vice-versa.

Securities prices are also influenced by the general economic performance at any given time. Stock markets are usually a good indicator of the state of the economy. A well performing economy reflects in higher and more sustainable activity by long term investors on the local bourse. Major political, economic and social events that occur in the country can indirectly affect a company listed on an exchange.

Another factor is the market itself. While a stock may rise and fall on its own merits, it may also benefit just by being in a market that is on the rise, called a ‘bull market’ or a market that is on a retreat, called a ‘bear market’.

Other securities such as bonds have their prices influenced by two main factors, the number of days before the next coupon (interest) payment and the expected yield or interest rates. When the expected or market interest rates are higher than the bond’s coupon rate then the bond itself will trade at a discount. When the expected yield is lower than the bond coupon then bond will trade at a premium. Bond holders will be holding an asset that is earning more than the prevailing markets rates and investors must pay a premium to hold such an asset.

FINSEC currently has two securities trading on its platform, ordinary equities and fixed income bonds. Our website has information on the daily prices and price movements of these instruments. Investors are encouraged to contact their financial advisors on more information and advice regarding stock market investments.

The Financial Securities Exchange (FINSEC) is a Zimbabwe registered securities exchange and a member of the Escrow Group. The Escrow Group has interests in the financial services and technology sectors. Corpserve Registrars and Escrow Systems are the other members of the group.

For more information contact:
2nd Floor ZB Centre, Cnr Kwame Nkrumah and 1st Street
Harare, Zimbabwe
Tel: +263 4 758193
Email: info@finsec .co.zw
Twitter: @FINSECZim

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