Do you know the answer to this question?  A lot of professionals on Wall Street would find it difficult to give you a complete answer.  Let’s start the thought process and see if we can arrive at an answer that is complete.  What influences the price of anything?  Supply and demand.  The smaller the supply of an item the higher the price it will have then if there was a greater supply of it in the market.  The greater a demand for an item the higher the price it will command in the market.  OK, that’s the simple stuff, now let us apply it to a share of common stock.

Before we continue let’s make sure we know what a share of common stock is.  A share of common stock is a claim on a company’s earnings and assets.  That doesn’t mean if you own a share of Kraft Foods Inc. (KFT) that you can walk into Kraft and demand that you get a box of their cheesiest macaroni.  Companies issue these claims so that they can raise capital.  Investors then buy them because they expect to have a claim on future earnings through dividend payments.  In theory when a company goes bankrupt and liquidates they should pay out to equity holders, stock holders, for their claim, but equity holders are the last ones paid in a Chapter 11, they are a residual claimant, and by the time it comes to pay them there’s usually nothing left to pay them with.

Imagine that all of the stock market exchanges closed tomorrow and would never reopen.  In this world you would never be able to sell your stock.  You would not want to buy the stock because you think at a later date someone will pay you more money for it, you can no longer sell it!.  So why own it?  You own the stock because of that claim on the company’s earnings, and the dividend payment; which is the company giving you your “share” of that claim on earnings.   Why then would you want to buy stock in a company that is not issuing dividend payments, or are issuing very low ones?  Because in the future you believe that they will issue payments, or if they already are, larger payments.  A company would begin to issue divdiend payments, or larger dividend payments because they are earning more, they are growing or becoming more efficient and thus more profitable.  This is why revenue growth and cost efficency is so important to a company, and why it should be very important to an investor investing in the company.

Let’s come back to the real world where stock exchanges do exist.  And let’s ask the question we started with again, “what influences the price of a stock?”  Supply and demand. We already got that part, but now that we know more we can expand that answer.  Supply influences the price of a stock because the smaller the supply of the outstanding shares of common stock, the greater the stock holder’s “share” of earnings will be, the greater their dividend payment.  There is a demand for common stock because of the claim on earnings that it entails and the dividend payment that comes with that claim.  When the dividend payment increases that is going to increase the demand for the stock.

Compacted answer: the smaller the amount of shares of common stock for the company in the market the greater its price than if there were more shares of the common stock  for the company in the market.  The larger the dividend payment the more expensive a share of common stock will be in the market.