How is the Stock/Trade Price Calculated?

by | Aug 29, 2020 | Basics, Share Market | 0 comments

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The stock market is one of the easiest ways to earn money but it’s equally risky. It can make you rich in just a span of a few minutes, but it can as well bankrupt you in the same span. So before entering you need to understand the basic concepts in a simple way. And we are here to help you in getting your basis cleared. Previously we have covered the below topics, so if you are new then do check the below articles as well and today we will cover the details.

Today lets understand how the stock price is calculated. Whenever you are checking any stock you would have seen that the price of the stock keeps on changes every second. But the interesting thing is that the changes are not symmetric. For example, let’s assume stock named “StopToExplore” is currently at a price of Rs. 80. Now you would observe the prices change per sec are somewhat like, 80>>82>>85>>86>>79>> and so on. These changes are not linear. Have you ever thought why so? If yes, then you will get the answer if no, then you need to start thinking of all metric before entering in the stock market to avoid loss.

So how is the Stock Price Calculated?

So the stock price which is visible is the Market Price? The answer to this is “YES” as well as “NO“. Oh, confusing, right? So to clarify this, the stock price shown is the “LTP” i.e. the “Last Traded Price“. So the last traded price becomes the current stock price that is offered to everyone, hence it is not linear. We had explained, in the article Types of Stock Market Trading in India, to make a successful trade it requires two parties to agree on a price for trading. On the agreed price the sellers sell the stock and buyers buy it. This completes the process of trade. Now at the price at which this trade is executed, becomes the LTP.

Let’s take an example: There is 1 buyer (A) and 2 sellers (X & Y). Assume the current price of the stock “StopToExplore” is 85. To keep it simple, looking at the current stock price Buyer A wants to buy the stock at 100 stocks at any price (he has placed Market order). Seller X has 50 stocks and he will be selling them @ 84 &  Seller Y has 50 stock and he will be selling @86.

Now as the order placed by Buyer A is market, there will not be any price restrictions and the order will get executed. Buyer A gets the 50 stocks from Seller X@84 and this changes the LTP to 84. Now the other 50 stocks at bought from Seller Y @86 which changes the LTP to 86. Hence you would see the continuous fluctuations in the stock prices. In this way, the stock price is calculated and hence keeps changing all time.

Note: The above example is used only for understanding. The actual scenario is much complex which involves market buy orders, Market Sell, Limit Buy, Limit Sell orders. We will be covering Market and Limit order incoming articles to help you get those concepts clarified.

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