Stock prices are determined by the last price at which a willing buyer and a willing seller agreed to trade. Every second, thousands of orders — bids and asks — are matched electronically on the exchange. The most recent matched price is what you see as the "current price."
The short-term answer: supply and demand. The long-term answer: the actual earnings power and growth of the underlying business. These two forces are often misaligned in the short run — which is where opportunity and risk both come from.
Every stock exchange maintains an order book for each listed stock — a real-time list of all pending buy orders (bids) and sell orders (asks).
The highest price a buyer is currently willing to pay. If 10 buyers want Infosys shares, they each submit a bid. The highest bid is at the top of the buy queue.
The lowest price a seller is currently willing to accept. Sellers submit asks. The lowest ask is at the top of the sell queue.
When a buyer's bid matches a seller's ask, the exchange's matching engine executes the trade instantly. The price at which they agree becomes the new "last traded price" — what you see as the current price on your app.
This process happens thousands of times per second for liquid stocks like HDFC Bank or Reliance. For illiquid small-cap stocks, there may be only a handful of trades per day — which is why their prices can gap sharply on any single large order.
| Driver | Short-Term Impact | Long-Term Impact |
|---|---|---|
| Quarterly earnings results | High — ±5% to ±20% in a day | Medium — sets earnings trend |
| FII/DII buying or selling | High — can move broad market | Low — flows reverse over cycles |
| RBI policy / interest rates | Medium | High — affects cost of capital |
| News / management change | High | Low (unless structural) |
| Business revenue growth | Low | Very High — primary price driver |
| Profit margins expanding | Low | Very High |
| Global market sentiment | High | Low |
| Budget / government policy | Medium–High | High (sector-specific) |
Graham described the market as "Mr. Market" — a manic-depressive business partner who comes to your door every day with a price. Some days he's euphoric and offers absurdly high prices; other days he's depressed and offers prices well below intrinsic value. The wise investor ignores his daily mood swings and only acts when the price is significantly different from the business's real worth. This is the foundation of value investing.
Quarterly and annual earnings reports are the single biggest fundamental driver. A company that consistently grows revenue and profits will see its share price rise over time. When Infosys or TCS beat earnings expectations, prices jump. When they disappoint, they fall — even if the overall market is up.
Foreign Institutional Investors manage trillions of dollars globally. When they decide to buy or sell Indian stocks en masse, the impact is enormous. In late 2024, FIIs sold approximately ₹1.5 lakh crore of Indian equities in a few months — causing Nifty to fall ~10–12%. DIIs (domestic mutual funds) were buying, providing some cushion. SEBI publishes daily FII/DII data — watching this can help understand institutional sentiment.
Lower interest rates = cheaper borrowing = higher investment = higher corporate profits = rising stock prices (generally). Higher rates do the opposite. RBI's Monetary Policy Committee meets every 2 months — their decisions and commentary move financial sector stocks most sharply.
Indian markets open after US markets close. A sharp fall in Dow Jones or S&P 500 at night will typically drag Nifty lower at the 9:15 AM opening. This happens because many FIIs operate globally and adjust their India positions based on global risk appetite. The correlation has increased as India's market has become more integrated with global capital flows.
Merger announcements, management changes, SEBI investigations, regulatory changes, election results — all of these can cause sharp short-term moves. These events can create temporary mispricings that long-term investors can exploit.
By the time you read news on your phone and place an order, institutional traders with algorithmic systems have already acted on it. Retail investors who trade based on news headlines are almost always buying after the price has already moved — at a disadvantage. The better approach: focus on understanding a business's long-term trajectory and tune out the daily noise.
This confuses many new investors. A fundamentally strong company can have a falling stock price for several reasons:
This is why stock prices and business quality can diverge significantly in the short term. Over 3–5 years, business fundamentals dominate. Over 3–5 months, sentiment and flows dominate.
When you buy or sell shares, you choose how you interact with the order book:
For liquid large-cap stocks, market orders are usually fine — spreads are tiny. For illiquid small-cap or mid-cap stocks, always use limit orders to avoid paying a much higher price than expected.
This article is part of our Stock Market Basics series. Read the full beginner's guide covering everything from how markets work to how to start investing.
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