How Are Stock Prices Determined?

Stock prices could determine whether you retire in comfort or you'll need to keep working for a few years. Here's how they work.

By Lou Whiteman – Updated Jul 2, 2025 at 9:37 PM | Fact-checked by Frank Bass

Key Points

Stock prices fluctuate based on supply and demand influenced by investor actions and sentiment.
Long-term value is dictated by a company's earnings, impacting stock prices as markets assess true value.
P/E ratio is used to assess if a stock is priced fairly compared to historical earnings data.

Value investing pioneer Benjamin Graham once said that the stock market is a voting machine in the short run but a weighing machine in the long run. Once a company goes public on the stock market and its shares start trading on an exchange, the share price is determined by supply and demand.

Over the long term, share prices are determined by the economics of the business. It's impossible to predict exactly what a stock will do and when, but we can study how share price movement works. Let's unpack Graham's statement a little more and go over how stock prices work.

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A graphic showing the factors that affect stock price: company health, supply, economic reports, demand, and trader sentiment. — Image source: The Motley Fool.

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Bid and Ask

Bid and ask are two points of a price quote. Bid is the price investors will pay for an asset, while ask is the price they’ll sell it for.

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In the short term, a stock's price is vulnerable to the emotional whims of the crowd. But in the long term, smart investors can pinpoint where the crowd's emotions set up opportunity. Focus on the long term in your investing, and don't let other people's emotions affect your investment decisions.

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About the Author

Lou Whiteman is a contributing Motley Fool industrials and financial services analyst covering aerospace, defense, transport, manufacturing, specialty finance, and bank stocks. Previously, Lou was a financial analyst and senior writer for TheStreet, a venture capital specialist for The Deal LLC, and a high school personal finance teacher. He holds a bachelor’s degree in communications from Loyola University Maryland and completed a fellowship at the ABA Stonier Graduate School of Banking.

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Lou Whiteman has positions in Home Depot. The Motley Fool has positions in and recommends Home Depot. The Motley Fool has a disclosure policy.