Stock Price: How the Market Sets the Market Value of a Share

The market value of a stock is not a number pulled out of thin air. It is the direct result of what buyers and sellers are willing to pay at any given moment. Understanding this mechanism is fundamental for any investor operating in markets like Wall Street, London, or Madrid.

The balance between buyers and sellers

Let’s imagine a company called “ABC” listed on the stock exchange. Its current price hovers around €16. Why exactly that price and not €20 or €10? The answer is simple: at that point, what someone is willing to pay matches what another is willing to receive. This is what economists call the Law of Supply and Demand.

As an investor, you might try to sell your shares at €34 each. But if the market price is around €16, you are unlikely to find a buyer. The opposite is also true: if you offer €12 per share when the market values it at €16, there will be no willing seller either. The market value is that consensus where transactions actually occur.

Why liquidity determines if market value exists

Not all assets have a useful market value. For one to exist, we need liquidity: the ability to enter and exit positions quickly.

We often see stocks that spike in price in a short time. The holder promises spectacular revaluation. But when we check the trading volume, we find that only a few buyers and sellers participated. In those cases, the price may reflect nothing: the trade simply doesn’t cross, or someone gets extremely favorable conditions due to the lack of a counterparty.

Companies like BBVA have immediate counterparts for their orders. In contrast, assets like Urbas rarely find buyers. If you invest in assets like non-listed debt or private equity, you’ll discover an unpleasant surprise when trying to liquidate: market value may exist in theory, but not in practice.

How market value is calculated

The relationship between market value and market capitalization is direct. If capitalization is the total value of the company according to the market, then:

Market Capitalization = Share Price × Total Shares Outstanding

Rearranging the formula gives us the price per share:

Market Value = Market Capitalization ÷ Total Shares Outstanding

In practice, brokers display this automatically in real time. What you’ll notice is the difference between Bid (selling price) and Ask (buying price). This spread, known as the Spread, is the commission charged by the intermediary.

Primary market versus secondary market

This is where many get confused. The primary market is where securities are born. Companies, governments, and organizations issue shares and bonds for the first time. The money goes directly to the issuer.

The secondary market is where 99% of your activity as an investor occurs. Here, owners of already issued shares trade among themselves. The market value you see on your screen always corresponds to this secondary market.

Critical difference: market value is not actual value

This is the point you should obsess over. Market value can be completely disconnected from what a company is truly worth.

Terra: Started at an equivalence of €11.81 per share. In less than a year, it reached €157.60. It was announced on prime-time TV as a stock market success. Three years later, it was absorbed by its parent company Telefónica and disappeared. The market value was driven by enthusiasm, not results.

Gowex: A Spanish company that boasted spectacular results. It presented itself as one of the largest Wi-Fi providers worldwide. Its stock kept rising relentlessly. Until a U.S. investigation by Gotham Research exposed it: it was a massive scam. Its CEO had lied to employees and investors about the viability of the business. The growing market value was completely fictitious.

These cases illustrate why the concept of “bubbles” exists. We invest because the price rises, not because we truly understand why it rises. Market value becomes a self-fulfilling prophecy until it collapses.

Market value versus book value

Net book value is different. It is calculated by dividing (Assets - Liabilities) by the total number of shares. It represents what each share “should” cost according to the accounting books.

Nominal value is even more basic: the original issuance price, based on dividing the share capital by the issued shares.

These three coexist in constant tension:

• Nominal value serves as a historical reference
• Book value interests value investors looking for undervalued assets
• Market value is what we actually pay today

Is market value efficient?

The honest answer: no. The market value of a stock reflects feelings, speculation, and herd behavior as much as actual fundamentals. Nor is the book value perfect.

In times of low interest rates and lax central banks, the premium market valued growth stocks (growth). Today, with higher rates, money migrates toward value stocks that generate consistent income. Market value changes not because the company changed, but because the macroeconomic context readjusts bets.

To navigate this, you need to understand that market value is the current consensus, not the truth. Use liquidity, volume, and fundamental analysis as anchors in that volatile reality. And always remember Terra and Gowex: the price that rises exponentially without substance often collapses just as quickly.