Hi Ahmed,
Well, share prices are arrived at based on their P/E (Price to earnings) and not by any other factor. That why when the P/E of a company goes very high, it is called overvalued. First let me tell you how the P/E is arrived at,
P/E can be arrived by dividing the current market price with the earnings per share. Say for example the EPS (Earning per share) of Gujarat Ambuja is 7 and it market price is 90 then its PE is 12.5. The average industrial P/E for cement sector is around 14 - 18 and so Gujarat Ambuja's share price will move in the range between 98 - 126 with its current earning level. If its earning potential increases its price too will move up.
This is how IPO' s are priced in the market. Say a company X is bringing out an IPO in 2006 and this company is an Infrastructure Company. The average P/E for infrastructure companies is around 30. If this companies expected Earnings per share for the year 2006 - 2007 is 10 then the company may price its IPO in the range of Rs.300 - Rs.350. (This is how IPO's are priced in the market.
Hope i am able to throw some clarity in pricing of shares.
Bye
A.K.Siva
www.art-of-investing.blogspot.com