The share price is the value of a company’s shares, determined by an initial public offering and market demand. Underwriters set a range for the share price based on past issues and current market conditions. Investors compare the market value to the book value and use the price/earnings ratio to determine potential profits.
The share price is the value assigned to a company’s shares. Public organizations will sell shares to increase capital reserves through equity investments. Initially, the companies will go through a process known as an initial public offering. A financial services underwriter will place an initial share price based on current market conditions and the company’s current financial position. After the initial offering, the company’s share price will rise and fall based on the demand for the company’s shares.
Setting the stock price to issue shares is not an easy process. The underwriter will often review past share issues for similar companies and review current market conditions before issuing a company’s shares. From this information, the underwriter will derive a range for the share price, such as $12 US Dollars (USD) to $15 USD. This gives potential buyers an idea of how much they will pay to buy the shares. If high demand is available for the new share issue, the share price can rise dramatically on the day of the issue, as more investors want the company’s shares.
While the price listed on the stock exchange is the market price at which investors will buy and sell shares, it is not necessarily the book value of the company’s shares. Investors will often compare the book value per share with the market value per share to determine if a premium exists. For example, a company has $1,000,000 in total assets, $500,000 in total liabilities, and 100,000 shares of stock outstanding. The book value of the company’s shares is $5 USD. If the current market price of the share is $7.50, then the company’s shares are trading at a premium of $2.50 compared to book value. A company that has shares that are below book value is generally not considered a good investment.
Another view on the share price is the multiple price at which the share is valued. A common formula for calculating this figure is the price/earnings ratio, which is the market price of a share divided by the company’s reported earnings per share. For example, stocks with a market value of $45 and current quarterly earnings per share of $2.50 mean the multiple of the stock is 18. If the company reports its next quarterly earnings of $2.75, then The investor can multiply the earnings per share by the multiple of 18, which indicates that the share price should rise to $49.50 USD, resulting in a $4.50 USD profit on the share.
Smart Assets.
Protect your devices with Threat Protection by NordVPN
