Why Stock Share Prices Are Meaningless

Many investors pay attention to stock share prices as if they are the only thing that is important in the market. In reality, stock share prices do not mean nearly as much as most people would have you believe. Here are a few things to consider about why stock share prices are meaningless and what is really important.

Stock Share Prices

Once you are an investor in the company, you are most likely going to pay attention to the price of the stock. You want the price of the stock to increase because it means that you are making money. However, before you are an investor, the price of the stock does not necessarily mean anything to you. When you are trying to decide on which stock to buy, you should not pay any attention to how big a company's stock price has become.

Lack of Information

When you simply look at the stock price of a company, you really do not have enough information to make a decision about the prospects of that particular company. You know how much the price of the stock is down but you do not necessarily know how many shares are in the market. For example, let's look at two companies stock prices. One company has a share price of $10 and one company has a share price of $100. If you were an uneducated investor, you might think that they would be much better to own stock in the company that has a share price of $100. However, when you look at things further, you find out that the first company has 1 billion shares while the other company has 1 million shares. This means that the company with a share price of $10 per share is much more valuable than the other company.

Earnings per Share

Instead of looking at the share price of a company, you want to look at the earnings per share. Earnings per share tells you how much money is being generated for every share that is outstanding in the market. When you are comparing two companies, comparing the earnings per share is going to give you much more information than the stock price.

In order to calculate the earnings per share of a company, you are going to take the net earnings and divide that by the amount of shares that are outstanding in the market place. For example, let's say that you were looking at investing in two companies that both had $100 million in revenue for the year. The first company has 1 million shares outstanding while the other company has 10,000 shares outstanding. By looking at earnings-per-share, you will see that the first company has earnings-per-share of $100. A second company has earnings per share of $10,000. This tells you that the second company is going to be a much better value for you as an investor. 

blog comments powered by Disqus