Stocks trade for a wide variety of prices. Penny stocks trade for prices less than a dollar, which is what their name suggests. Some stocks buy and sell for very high prices such as shares of Berkshire Hathaway (BRK-A) which recently sold for $131,500! Most stocks trade between a couple of dollars and a few hundred dollars per share.
One common misconception is that the stock price equates with the value of the company or the stock ie a stock that trades for $20 is cheaper than a stock that trades for $50. This is NOT TRUE! Different companies have different number of shares outstanding so a share in one company is not the same portion of ownership as a share in another company.
For example if company A was worth $1 million dollars and had 10,000 shares outstanding then each share would be worth $100. Company B is worth $5 million dollars but has a million shares outstanding so each share is worth $5 each. Clearly the stock price has no bearing on the value of the company since in our example – company A had a higher stock price than company B but the value of company A was much less than company B.
By the same logic – a stock that trades for $10 is not “cheaper” than a stock that trades for $500 – you have to look at how much of the company each stock represents. Another factor is stock splits – a company with a $2 stock could do a 5:1 buyback and it should result in a $10 stock as a result. Obviously in that case the value of the company or your stock ownership hasn’t changed.
Does the stock price matter when evaluating a company?
No, it doesn’t. It should be ignored.
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“One common misconception is that the stock price equates with the value of the company or the stock ie a stock that trades for $20 is cheaper than a stock that trades for $50.”
Your article is introducing two misconceptions — you can’t gauge a stock’s value by looking only at the price, which was well covered; and a stock’s price doesn’t reflect its true book value, which wasn’t covered at all. You’re teasing us! I know you want to keep it short and simple, but the latter is much more interesting and is worthy of a followup article.
Regards,
Greg
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