Stock Price and Company Value

Posted by Blain Reinkensmeyer
April 18, 2007 at 1:18 pm

This is a fantastic question which was sent in by Justin who is just a reader here at the ST101 Community (no website for link lovin) and I think it fits PERFECTLY into the 101 mindframe! Let’s take a look at his question,

“Blain,

It has puzzled me for as long as I know, and I imagine many people are the same way, but why are some companies worth more than others even though their stock price is less? Google has a stock price of $500, but is smaller than Exxon Mobil who’s stock price is only $78, and Microsoft who’s stock price is $28.

I have been a reader of your blog for over a month, and want to say that what you have going here is great. Your articles are wonderful and your enthusiasm is enjoyable.

Thank you for the help,

Justin”

Alright Justin! Well first off thanks for shooting over the question (this week is question week for those just stopping in) and thank you for the kind remarks! This party is great simply because of you the readers, I wouldn’t be here without you guys! Now to tackle this question…

Stock Price Does Not Equal Company Value

One of the most common confusions in the stock market has to do with the stock price and what the company is actually worth. What Justin is really asking in simple terms is this, “How can Microsoft (MSFT) be worth $280 Billion dollars, but only have a stock price of $28?”

The answer lies not in the stock price, but in the number of shares Microsoft has issued. When a company goes public, they issue shares of stock at xx price. So for example let’s say we take our toy making company public, who’s name is JC Toys. Keeping things simple, our company receives a ticker, or unique symbol that it will be known by on the market (lets say its JCT), and is valued to be worth 10 million dollars. If we want our stock price to be $10, then that would mean we issue 1,000,000 shares valued at $10 each (10 x 1,000,000 = 10 million). If we wanted our stock price to be $100, then we would issue 100,000 shares at $100 each (100 x 100,000 = 10 million).

If you can see the connection being made here, it doesn’t matter if our company stock (JCT) is trading at $10 per share or $100 per share or heck even $1,000 per share, our company is still worth the same amount of 10 million dollars.

Company Value / Stock Price = Total Shares

SO, when we look at Microsoft being worth $280 billion dollars, this HUGE company, but only has a stock price of $28 per share, can you now see how this is possible? Here are the facts,

Microsoft Company Value = $280 Billion
Microsoft Stock Price = $28
Total Shares = ??

Can you guess how many shares Microsoft has? If we divide $280 Billion by $28 we get 10 billion, or the number of total shares Microsoft has issued! (Please note: this has been simplified for math purposes, Microsoft actually has 9,792,300,000 shares priced at a last price of $28.48). With this established, we now know how company’s can have different stock prices and different company values, it all boils down to the number of shares

Our Question Answered

Let’s take a look back at Justin’s question, “…why are some companies worth more than others even though their stock price is less?” And the answer is simply because each company has a different number of total shares. Our toy company JCT can trade at $100 per share, $10 per share, or even $1000 per share and STILL be worth $10 million dollars. This is because our number of shares can differ depending on what price we want our stock to sell for.

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2007-04-23 10:43:07

[...] MORE INVESTOR EDUCATION - Last week I tackled the tough a tough question on relating stock price and company value, and this week I have a great article in the making on what you have to know to make a stock trade [...]

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