How to Calculate Share Price

How to Calculate Share Price

INTRO

 

Share price, or the share price of a company, can be calculated in several different ways. The method used depends on what information and data you have at your disposal and whether you want to calculate the price-per-share or the market capitalization of a company. As with any other type of financial formula, it’s also important to know whether you’re calculating share price based on the stock exchange value or an intrinsic value of a company.

What is a company’s total value

As its name suggests, a company’s total value is calculated by adding up the total number of shares outstanding. Investors who buy stocks in a company are buying shares that represent an ownership stake in the business. The more outstanding shares there are for purchase, the lower each individual share will be worth. Thus, because companies have different levels of activity and liquidity, they will often adjust their share price in order to promote trading at higher volumes with less volatility. In addition, using a float – representing what percentage of a company’s outstanding shares are available for public trading – shareholders may also make adjustments to their share price if they believe that it has become too valuable due to high demand and shortage of supply.
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The formula behind the math

 

P = Q x (F/S) ^ E (E is 0.05 for some countries, including the UK)
where P = share price, Q = number of shares traded that day, F = last trade value, and S = share capital. For example: a company that has 5 million shares traded at a value of £1 per share with a £100 million share capital would have their share price at £5 (5 million multiplied by £1 divided by 100).


Valuation ratios and other components

Although there are many different valuation metrics and ratios that can be used to determine the fair value of a company, the most common is Return on Equity. It is calculated by dividing a company’s net income or earnings before interest and taxes by its book value of equity or capital. With this information, an investor can make estimates as to what they think the price should be per share if they were going into a negotiation with the other shareholders. The higher this ratio is, the more likely an investor will buy shares of that company because it means that there is a greater return on their investment should they decide to sell their stake at some point in time. Another important factor in share pricing is Dividend Yield.

 


Using Free Financial Ratios Online

There are many factors that go into calculating share price and value. One of the easiest ways to find out the value of a company is by using simple financial ratios. The most common ratios include market value per share, price-to-earnings ratio, price-to-sales ratio, dividend yield and enterprise value. These ratios take information that is already public knowledge, such as stock prices and earnings reports, then produce a number that tells investors what the company should be worth today.


Common Stocks vs. Preferred Stocks

Common stocks can be issued by any company but preferred stocks can only be issued by a limited number of companies. Preferred stocks typically offer greater income, dividend payments and other benefits such as special voting rights than common stock. Investors are required to pay the par value when they purchase the shares, which is the stated or face value of the share at the time it was created. Shares in general represent ownership in a company, but preferred shares often have specific terms attached that require payment before dividends are paid on common shares, for example if there is not enough money available for dividend payments.


Common Stock VS Preferred Stock

Common stock is, in many ways, the cornerstone of most companies. The shares held by people like you and me are the company’s main source of capital; they’re also a representation of our right to vote on matters brought before the shareholders.
Shares trade on a stock exchange with two prices – bid and ask. The ask price is what someone will charge you for your share, while the bid price is what they’ll sell it for. A quick analogy would be if I wanted to buy a house from you, I’d offer to pay you an ask price, say $100k, but when I want to sell my house again I have no idea what that might be so I list it at $115k or less.


Do Companies Have To Issue Both Classes of Stock?

Companies issue both classes of stock because owning one type of share does not entitle the owner to voting rights and does not give them any control over company decisions. Voting shares, also known as common shares, offer a proportional say in how the company is run by electing members to the board of directors and by giving these shareholders at least one vote per share. Non-voting shares (also known as preferred shares) provide their owners with fixed payments instead of a proportional vote.

Common Stocks and Preferred Stocks

In terms of calculating share price, preferred stocks and common stocks are two different investments. Preferred stocks usually offer some advantages over common stocks because they are higher in rank than common stocks in the order of liquidation when a company is liquidated for assets. Preferred shareholders get their preference as to dividends or repayment before the holders of common stock can have a say in any proceedings, which is why they are sometimes called preferred interests. Another major difference between these two types of securities is that unlike common shares, preferred shares do not give investors voting rights on company policies or major financial decisions.

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