How are share prices calculated?

[Notshortnottall]

I understand - at least in principle - how the stock markets work (supply & demand / shorting / leveraging / confidence / performance etc.) but one thing that's just dawned on me is that I don't really appreciate what this practically means in the calculation of a price at a point in time i.e. how are those things translated into tangible data points that drive a (assumedly complex!) algorithm to determine what to physically display on a board / website etc.

In other words - at a given point in time, how is a physical share price calculated (i.e. the price that's displayed on say, the FTSE 100?

• Assumedly it's a closed set of input parameters / factors - if so, what?
• Is this a closely guarded algorithm? (I'm inclined to think so as otherwise you could use that in fairly accurate predictive models?)
• Is it universally applied, or does it differ across markets?

Apols. in advance if this is a daft question but I've had a Google and didn't really find anything that gave me a sensible answer.

[CharlesElliott]

There are two aspects to this - what a buyer / seller thinks the value of a share is given whatever they personally use to base that on; company profits, future potential, short term bet, level of dividend paid etc.

But the price that is displayed when you look at a marke is the mid-point between what people are buying at and what people are selling at. On an exchange like the London Stock Exchange, the exchange is doing nothing other than matching buyers and sellers and displaying the prices that those trades take place at. So - very simplistically - it is solely the buyers and sellers of shares that set the price.

[Abdul Abulbul Amir]

Expected future profits (cashflows) discounted at an appropriate rate to take into account the market risk and inherent risk of the particular company.

[uknick]

Google Black–Scholes model if you want to blow your brain. It's one of the many valuation models used by the industry I was taught during my accountancy studies.

All of which went over my head apart from the last one we were taught. And that was, many take over share prices are agreed by seeing who can pee higher up the wall!! I think the point was, it doesn't matter how scientific you are in your calculations, at the end of the day it comes down to human nature.

[Simpo Two]

uknick said:

All of which went over my head apart from the last one we were taught. And that was, many take over share prices are agreed by seeing who can pee higher up the wall!! I think the point was, it doesn't matter how scientific you are in your calculations, at the end of the day it comes down to human nature.

And that explains why analysts get things wrong - human nature/sentiment can't be quantified. If it could, every prediction would be accurate...

[Notshortnottall]

Thanks all for the very helpful responses. That makes more sense but has also sent me down some rabbit holes of extra investigation!