Stock Prices Do Not Represent Stock Value (or Company Value)

by ABC

prices-valueStocks 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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