Expert: Steve Hach - 4/25/2010

Question
I always thought that the stock price could only be marcap divided by existing shares to get the amount of the stocks value. But I also hear how the price of stocks can be based on demand, meaning that if there is high demand the stock price can be pushed up further. Well how to these two things work with each other? Wouldn't the marcap divided by existing shares calculation be messed up if the price was changed due to demand? This is difficult for me to explain, hopefully you can offer some insight on changing stock prices and how different things conflict with each other to change stock price (or value), thanks.

Answer
Mike,

Thanks for the question.

If there are a finite number of shares and there is more demand for the shares, the price goes up.

Remember that while the stock price is equal to the market cap divided by the number of shares, the number of shares multiplied by the price equals the market cap.

So, as the stock price goes up due to demand, the market cap increases.

At the most basic level, there is no "conflict" here, you are just doing an equation by looking at a different variable.

Check out the recent price of AAPL shares as an example of this issue.

People thought the iPad would be a big boon to the company so they decided to buy AAPL shares.

Higher demand means more people wanting the same number of shares but willing to pay more for those shares.

Thus, the price goes higher.

They kept increasing in value and in terms of market cap Apple recently passed MSFT to be the number two company in the US--behind XOM.

Hope this helps.

Best,

Steve