Post by fastwalker on Sept 26, 2004 12:16:47 GMT -5
What is a company worth?
A common misconception among beginner investors is that the value of a company is its stock price. This might sound counter-intuitive, but it's incorrect to think that a company trading at $50 is necessarily worth less than another trading at $100.
A company's worth, its total value, is its market capitalization. Market cap (as it is commonly referred to) is the stock price multiplied by the number of shares outstanding (the total number of shares a company has). For example, a company that trades at $100 per share and has 1,000,000 shares outstanding (market cap = $100,000,00) has a lesser value than a company that trades at $50 but has 5,000,000 shares outstanding (market cap = $250,000,000).
This means that even though the company with a $50 stock trades at a lower price, investors feel that its company value as a whole is more than double the value of the company trading at $100.Market capitalization changes everyday when the price of a stock moves up and down. It will also change if a company issues new shares or buys back shares from the public. The bottom line is don't equate a company's value with its stock price.
