Forex Education Center- How Stock Prices Determined,Price of a stock is determined by market participants based on the demand and supply of the relevant shares in the capital market, where the relationship between price and supply is negative (increased offer price drop), while the relationship between price and demand is positive (increasing demand prices rise ).
Another thing that affects the supply and demand for a stock of which is the expectation or hope in the future of the company and the issue of performance issues related to the company concerned, giving rise to speculation that is temporary (in the Indonesian capital market just as the stock is known as fried stock ).
One of the theories about the stock price in the continuous cycle of professional investment is the Efficient Market Hypothesis (EFM), although this theory has been discredited by many widely, both in academic circles and capital markets professionals. In summary, theory suggests that the price of an equity share is price efficient and will tend to follow the movement of randomly determined by the emergence of late-breaking news (randomly) from time to time. Therefore professional equity investors who tend to spend their time immersed in the flow of information is fundamental in order to gain an advantage over their competitors competitors (mainly other professional investors) by more intelligently interpreting the flow of information (news) is emerging.
EFM theory does not seem to give a complete picture of the process of equity price determination, such as the stock market is more stable than a theory that assumes that the price is the result of the discounted future cash flows expected to be incurred. In recent years it has been realized that the stock market is not perfectly efficient, perhaps especially in emerging markets or other markets in which the level of professional activity (availability of good information) is still lacking.
Another theory of share price determination comes from the field of Behavior Finance (Finance). In the financial behavior, it is believed that people sometimes make irrational decisions, especially related to the purchase and sale of shares is based on fear and a false perception of an event. Irrational trading can often create stock prices deviate from rational price, which is based on the assessment of the fundamental price. For instance, during the technology bubble that occurred in the late 90s and then burst back in 2000-2002, technology firms are often negotiable far beyond the rational fundamental value because of what is commonly known as the theory of "greater folly ". Stupidity Greater theory states that because the predominant method to realize profits from the sale of shares to other investors, a person should choose stocks that they believe that others will judge these shares at a higher level in the future.
