Last week a friend messaged me and asked what caused NCBFG’s (NCB Financial Group) stock price to fall from about $190 to roughly $175.

In trying to figure out the best way to frame a response to her, I realised that what she was asking was actually a very common beginner question that I get asked all the time.

So I decided to write this explanation to help her (and all you guys) to understand what determines share price movements. So, let me begin by providing some context.

Over the last few weeks, shareholders of the NCB Financial Group (stock ticker: NCBFG) had seen their stock price increase by about 32 per cent — shares went from $151.11 to $199.64.

Some people made the claim that the increase was because of the good news expected to come when NCB released their first set of results. These will be the first released after having purchased 62 per cent of the shares in the entire Guardian Life Group of Companies and now being the largest and controlling owner.

However, less than a week later on July 5, in the middle of this price rise, came a sudden 12 per cent drop. NCBFG ended that day at $175.88. Much lower than the previous high of $199.64. It was this drop that prompted my friend to ask what caused it.

I was about to answer then I realised that the real problem was also the question that she was indirectly asking.

So, what caused NCBFG’s stock price to fall, is actually asking: What determines the price of a share each day?

I’ll give the simple answer upfront.

The price of a company’s stock on the stock exchange is determined by whatever price the person(s) who bought it before you paid.

It’s that simple, but as always the details matter.

The price of a share (or the price of anything for that matter) is determined not by the person who puts the price tag on it, but rather by the person who pays the amount on the tag.

For example, suppose you have a 1998 Corolla, which the valuator says is worth $350,000 but you decide to advertise it for $800,000. Your price might be considered crazy, but if you can get someone to pay you $800,000 for it, then that’s what it’s worth, of course, that would only apply to that specific car.

Stocks have one little magical element to them. If you recall, when I wrote ‘ What the Heck is a Stock?’ I mentioned that every common share in a company is always equal to every other common share.

There is an old Latin phrase that describes this, it is, ‘pari passu’. Its translation is ‘equal ranking’ or ‘moving together’. Common shares in a company are all pari passu, so any change in one, is a changed in all.

If the 98 Corolla worked the same way, when you sold yours for $800,000 at that very moment, every ’98 Corolla of that model in the world would be each worth $800,000. Now fortunately (or unfortunately?), cars don’t work that way, but shares/stocks do.

So if you have a Company named Company X, and you are selling 100 shares in Company X for $150, at the moment when someone pays $150 for those shares, every share of that type in Company X is also worth $150.

What does this have to do with NCBFG’s price?

Well what a stock exchange does is create a place in which all buys and sells of all shares on the exchange are recorded and their selling price noted. The JSE does this every second of every day that the market is open (weekdays from 9:30am – 1:00 pm). In order to determine the price, they take the average price of all of the shares of that company that traded since the start of the day.

So if 1000 NCBFG shares traded in three transactions, the average price of all the shares in those transactions is the price of NCBFG for that day. This is a lot of calculating, but luckily the JSE’s computers do it all for us automatically, and we get a number, which after the end of the trading day, is given as the price of shares in that company.

This is also referred to as the “closing price” and is what you might hear mentioned on the business news each night.

So on July 5, approximately 1.6 million NCBFG shares were traded This is a large enough amount as it means more than $293 million worth of NCBFG shares traded that day.

Most of it happened in a large single transaction, which in the plainest of terms means someone with a lot of NCB shares agreed to sell them to someone with a lot of Jamaican dollars. The average price of the shares in that transaction was about $175. The amount of shares were so large, however, that the average price for the entire day fell to $175.88.

Of course, the sharp ones among us would have figured out by now that the transaction was a one-off thing, and the price will return to where it had been trending.

This is exactly what happened with NCBFG and it ended trading just a few days later on July 11th at $200.27.

So, in conclusion, what determines a company’s share price each day? The average price of the shares traded on the exchange that day determines the company’s price. This number is the number also mentioned in the business news as the amount a stock “closed at” each day.

Hope this one cleared it up for you guys. If it didn’t, let me know on social media and I’ll see what I can do with the feedback. See you next week!

Randy T. Rowe is a Corporate Strategy Consultant and self-taught stock investor. You can find him on Twitter @RTRowe and on his Personal Finance website www.everymickle.com . He was last seen in a bar in Portland arguing that the secret to a happy marriage is to ensure that you and your partner are pari passu.