What is the fair value of a stock given the bid and ask prices? Is there such a relationship?
None of the above. The fair value is a term used to describe an analytical result of projecting the company's future dividends and profits into a present value.  Such estimates are published by the likes of Morningstar, S&P and Value Line.  It is quite common for a stock to trade well above or below such estimated fair values. Fair value can mean many different things depending on the context. And it has nothing to do with the price at which your market order would be executed. For example if you buy market, you could get executed below 101 if there are hidden orders, at 101 if that sell order is large enough and it is still there when your order reaches the market, or at a higher price otherwise. "If you need to show that the sale/purchase was at FMV, then showing that you made a trade on a public exchange with an unrelated counterpart is enough to establish FMV. However, this is only one of the possible ""fair market value"" definitions. This is usually used to determine basis or value for tax purposes. For valuation purposes or general accounting, one specific trade is not enough to establish FMV, and much more research is required."
It is possible to figure out the next price. Just not for Joe Average. A stock exchange has a orderbook. This has two sides. One side has alle the buyers, how many shares they want, and what they are willing to pay. The other side has all the sellers, how many shares they got, and what price they are willing to accept. If any buyers and sellers match up, their orders are executed, money and shares are exchanged, everyone is happy. So the current asking price (the price you have to pay, to get some shares) is currently 12.46$. Let's say you want 6000 shares, for any price. The orderbook now looks like this: Your order is executed, you get 6000 shares for a total of 74,761$ (5900 * 12,46 + 100 * 12,47$). The order book now looks like this: The new asking price is 12.47$. Congrats, you knew the price in advance. Of course this is simplified, there are millions of entries on both sides, thousands of trades happen every millisecond and you'll have to pay the stock exchange a lot of money to give you all this information in real time.  That's what high frequency traders are doing. They use highly specialised computer systems to exploit differences in stock exchanges all over the world. It's called arbitage. They have to be faster than the other guy. This race has gone on for a few years now, so that the limiting factor starts to become the speed of light. YOU are not going to benefit, or else you would not be asking questions on PERSONAL finance :) In the world of stock exchanges, the result depends on the market state of the traded stock. There are two possibilities, (a) a trade occurs or (b) no trade occurs. During the so-called auction phase, bid and ask prices may overlap, actually they usually do. During an open market, when bid and ask match, trades occur. "You've described the process fairly well.  It's tough to answer a question that ultimately is 'how is this fair?' It's fair in that it's part of the known risk. And for the fact that it applies to all, pretty equally. In general, this is not very common. (No, I don't have percents handy, I'm just suggesting from decades of trading it's probably occurring less than 10% of the time). Why? Because there's usually more value to the buyer in simply selling the option and using the proceeds to buy the stock. The option will have 2 components,  its intrinsic value (""in the money"") and the time premium. It takes the odd combination of low-to-no time premium, but desire of the buyer to own the stock that makes the exercise desirable." Try to find the P/E ratio of the Company and then Multiply it with last E.P.S, this calculation gives the Fundamental Value of the share, anything higher than this Value is not acceptable and Vice versa. "Assuming you are executing your order on a registered exchange by a registered broker, your order will be filled at the best bid price available.  This is because brokers are legally obliged to get the best price available. For example, if the market is showing a bid of 49.99 and an offer of 50.01 and you submit an order to offer 1000 shares at 5.00, your order will be filled at 49.99.  This is assuming the existing bids are for enough shares to fill all of the 1000 shares being offered.  If the share you are offering lacks the necessary liquidity to fill the order - i.e., the 49.99 bid is for less than 1000 shares and the ""level two"" bids are not enough to fill the remaining shares, then the order would be posted in the market as an offer to sell the balance (1000 - shares filled at 49.99 and those filled at level two bids) at 5.00.   I'm pretty sure that the scenario you are describing would be described as market manipulation and it would be against the law." "Here is how I would approach that problem: 1) Find the average ratios of the competitors: 2) Find the earnings and book value per share of Hawaiian 3) Multiply the EPB and BVPS by the average ratios. Note that you get two very different numbers.  This illustrates why pricing from ratios is inexact.  How you use those answers to estimate a ""price"" is up to you.  You can take the higher of the two, the average, the P/E result since you have more data points, or whatever other method you feel you can justify.   There is no ""right"" answer since no one can accurately predict the future price of any stock." Yes, stock price is determined by the last trade price. There are always going to be people who have put in a price to buy a stock (called a bid price) and people who have put in a price to sell a stock (called an ask price). Based on your example, if the last trade price for the stock was $1.23, then you might have the following bid prices and ask prices: So if you put in a limit order to buy 100 shares at $100, you would buy the 40 shares at $1.23, the 15 shares at $1.24, and the 45 shares $1.25.  The price of the stock would go up to $1.25. Conversely, if you put in a limit order to sell 100 shares at $0.01 (I don't think any broker would allow a sell price of $0.00), you would sell 30 shares at $1.22, 20 shares at $1.21, and 50 shares at $1.20.  The price of the stock would go down to $1.20. It depends completely on the current order book for that security.  There is literally no telling how that buy order would move the price of a stock in general. "This is a misconception. One of the explanations is that if you buy at the ask price and want   to sell it right away, you can only sell at the bid price. This is incorrect. There are no two separate bid and ask prices. The price you buy (your ""bid"") is the same price someone else sells (their ""sell""). The same goes when you sell - the price you sell at is the price someone else buys. There's no spread with stocks. Emphasized it on purpose, because many people (especially those who gamble on stock exchange without knowing what they're doing) don't understand how the stock market works. On the stock exchange, the transaction price is the match between the bid price and the ask price. Thus, on any given transaction, bid always equals ask. There's no spread. There is spread with commodities (if you buy it directly, especially), contracts, mutual funds and other kinds of brokered transactions that go through a third party. The difference (spread) is that third party's fee for assuming part of the risk in the transaction, and is indeed added to your cost (indirectly, in the way you described). These transactions don't go directly between a seller and a buyer. For example, there's no buyer when you redeem some of your mutual fund - the fund pays you money. So the fund assumes certain risk, which is why there's a spread in the prices to invest and to redeem. Similarly with commodities: when you buy a gold bar - you buy it from a dealer, who needs to keep a stock. Thus, the dealer will not buy from you at the same price: there's a premium on sale and a discount on buy, which is a spread, to compensate the dealer for the risk of keeping a stock." "The ""price"" is the price of the last transaction that actually took place. According to Motley Fool wiki: A stock price is determined by what was last paid for it. During market hours (usually weekdays from 9:30AM-4:00PM eastern), a heavily traded issue will see its price change several times per second. A stock's price is, for many purposes, considered unchanged outside of market hours. Roughly speaking, a transaction is executed when an offer to buy matches an offer to sell. These offers are listed in the Order Book for a stock (Example: GOOG at Yahoo Finance).  This is actively updated during trading hours. This lists all the currently active buy (""bid"") and sell (""ask"") orders for a stock, and looks like this:  You'll notice that the stock price (again, the last sale price) will (usually*) be between the highest bid and the lowest ask price. * Exception: When all the buy or sell prices have moved down or up, but no trades have executed yet." "The current stock price you're referring to is actually the price of the last trade.  It is a historical price – but during market hours, that's usually mere seconds ago for very liquid stocks. Whereas, the bid and ask are the best potential prices that buyers and sellers are willing to transact at: the bid for the buying side, and the ask for the selling side.  But, think of the bid and ask prices you see as ""tip of the iceberg"" prices.  That is: The ""Bid: 13.20 x200"" is an indication that there are potential buyers bidding $13.20 for up to 200 shares.  Their bids are the highest currently bid; and there are others in line behind with lower bid prices.  So the ""bid"" you're seeing is actually the best bid price at that moment.  If you entered a ""market"" order to sell more than 200 shares, part of your order would likely be filled at a lower price. The ""Ask: 13.27 x1,000"" is an indication that there are potential sellers asking $13.27 for up to 1000 shares.  Their ask prices are the lowest currently asked; and there are others in line behind with higher ask prices.  So the ""ask"" you're seeing is the best asking price at that moment.  If you entered a ""market"" order to buy more than 1000 shares, part of your order would likely be filled at a higher price. A transaction takes place when either a potential buyer is willing to pay the asking price, or a potential seller is willing to accept the bid price, or else they meet in the middle if both buyers and sellers change their orders. Note: There are primarily two kinds of stock exchanges.  The one I just described is a typical order-driven matched bargain market, and perhaps the kind you're referring to. The other kind is a quote-driven over-the-counter market where there is a market-maker, as JohnFx already mentioned.  In those cases, the spread between the bid & ask goes to the market maker as compensation for making a market in a stock.  For a liquid stock that is easy for the market maker to turn around and buy/sell to somebody else, the spread is small (narrow).  For illiquid stocks that are harder to deal in, the spread is larger (wide) to compensate the market-maker having to potentially carry the stock in inventory for some period of time, during which there's a risk to him if it moves in the wrong direction.    Finally ... if you wanted to buy 1000 shares, you could enter a market order, in which case as described above you'll pay $13.27.  If you wanted to buy your shares at no more than $13.22 instead, i.e. the so-called ""current"" price, then you would enter a limit order for 1000 shares at $13.22.  And more to the point, your order would become the new highest-bid price (until somebody else accepts your bid for their shares.)  Of course, there's no guarantee that with a limit order that you will get filled; your order could expire at the end of the day if nobody accepts your bid." "You'll generally get a number close to market cap of a mature company if you divide profits (or more accurately its free cash flow to equity) by the cost of equity which is usually something like ~7%.    The value is meant to represent the amount of cash you'd need to generate investment income off it matching the company you're looking at. Imagine it as asking ""How much money do I need to put into the bank so that my interest income would match the profits of the company I'm looking at"". Except replace the bank with the market and other forms of investments that generate higher returns of course and that value would be lower." "If the time horizon is not indicated, this is just a ""fair price"". The price of the stock, which corresponds with the fair value of the whole company. The value, which the whole business is worth, taking into consideration its net income, current bonds yield, level of risk of the business, perspective of the business etc.. The analyst thinks the price will sooner or later hit the target level (if the price is high, investors will exit stocks, if the price is cheap, investors will jump in), but no one knows, how much time will it take." "Generally, a share of stock entitles the owner to all future per-share dividends paid by the company, plus a fraction of the company's assets net value in the event of liquidation.  If one knew in advance the time and value of all such payouts, the value of the stock should equal the present cash value of that payout stream, which would in turn be the sum of the cash values of all the individual payouts. As time goes by, the present cash value of each upcoming payout will increase until such time as it is actually paid, whereupon it will cease to contribute to the stock's value. Because people are not clairvoyant, they generally don't know exactly what future payouts a stock is going to make.  A sane price for a stock, however, may be assigned by estimating the present cash value of its future payments.  If unfolding events would cause a reasonable person to revise estimates of future payments upward, the price of the stock should increase.  If events cause estimates to be revised downward, the price should fall. In a sane marketplace, if the price of a stock is below people's estimates of its payouts' current cash value, people should buy the stock and push the price upward.  If it is above people's estimates, they should sell the stock and push the price downward.  Note that in a sane marketplace, rising prices are a red-flag indicator for people to stop buying.  Unfortunately, sometimes bulls see a red flag as a signal to charge ahead.  When that happens, prices may soar through the roof, but it's important to note that the value of the stock will still be the present cash value of its future payouts.  If that value is $10/share, someone who buys a share for $50 basically gives the seller $40 that he was not entitled to, and which the buyer will never get back.  The buyer might manage to convince someone else to pay him $60 for the share, but that simply means the new buyer is giving the the previous one $50 that he wasn't entitled to either.  If the price falls back to $10, calling that fall a ""market correction"" wouldn't be a euphemism, but rather state a fact: the share was worth $10 before people sold it for crazy prices, and still worth $10 afterward.  It was the market price that was in error. The important thing to focus on as a sane investor is what the stock is actually going to pay out in relation to what you put in.  It's not necessary to look only at present price/earnings ratios, since some stocks may pay little or nothing today but pay handsomely next year.  What's important, however, is that there be a reasonable likelihood that in the foreseeable future the stock will pay dividends sufficient to justify its cost." "Say we have stock XYZ that costs $50 this second. It doesn't cost XYZ this second. The market price only reflects the last price at which the security traded. It doesn't mean that if you'll get that price when you place an order. The price you get if/when your order is filled is determined by the bid/ask spreads. Why would people sell below the current price, and not within the range of the bid/ask? Someone may be willing to sell at an ask price of $47 simply because that's the best price they think they can sell the security for. Keep in mind that the ""someone"" may be a computer that determined that $47 is a reasonable ask price. Remember that bid/ask spreads aren't fixed, and there can be multiple bid/ask prices in a market at any given time. Your buy order was filled because at the time, someone else in the market was willing to sell you the security for the same price as your bid price. Your respective buy/sell orders were matched based on their price (and volume, conditional orders, etc). These questions may be helpful to you as well: Can someone explain a stock's ""bid"" vs. ""ask"" price relative to ""current"" price? Bids and asks in case of market order Can a trade happen ""in between"" the bid and ask price? Also, you say you're a day trader. If that's so, I strongly recommend getting a better grasp on the basics of market mechanics before committing any more capital. Trading without understanding how markets work at the most fundamental levels is a recipe for disaster."