How Stocks Are Priced: Supply, Demand, and Value

A stock's price is the price at which the last buyer and seller agreed to trade. It changes constantly because the balance between buyers and sellers shifts every second. Underneath that short-term movement sits a longer-term anchor: the company's underlying value.

Price: The Short-Term Story

In the market, price is set by supply and demand:

• More buyers than sellers → price rises
• More sellers than buyers → price falls
• Equal pressure → price holds

The exchange's order book shows this live: every bid and ask is a real order waiting to fill.

Factors that move prices minute-to-minute:

• Earnings releases
• News and analyst upgrades/downgrades
• Macro data (inflation, jobs, interest rates)
• Sentiment and order flow

Value: The Long-Term Story

A company's fair value is what the business is worth based on future cash flows. Analysts estimate it with valuation models:

Method	What It Compares
P/E ratio	Price per share vs. earnings per share
DCF	Discounted future cash flows
PEG ratio	P/E adjusted for growth
P/B ratio	Price vs. book value of assets
Dividend discount	Present value of future dividends

Price can drift far from value for long stretches, but eventually the two reconnect — either the price falls toward value, or the business grows into its price.

Price vs. Value

• Price is what you pay — visible, real-time, set by the crowd
• Value is what you get — estimated, slower-moving, set by fundamentals

Warren Buffett's teacher Benjamin Graham put it simply: "In the short run, the market is a voting machine; in the long run, it is a weighing machine."

Practical Takeaways

• Don't assume a high price means a company is expensive — check valuation ratios
• Don't assume a falling price means cheap — the business may be deteriorating
• Compare price to value over time, not in a single snapshot

Understanding the gap between price and value is one of the most important edges a beginner can develop. Charts tell you what the crowd is doing today; fundamentals tell you what the business is actually worth.