What is a share of stock?
Despite how it sometimes appears, a share of stock is not just a piece of paper that bounces around at different prices. A share of stock represents an ownership interest in a real company. If the local barber shop is owned by 2 equal partners, the math is easy. In general, the two partners would own 50% of the business and the profits would be split 50/50. For larger businesses, ownership is usually broken into a million or more equal pieces called shares.
If ownership of XYZ Industries has been divided into 1,000,000 equal shares, if you buy 100,000 shares of XYZ you would own 10% of the company (100,000 shares divided by the 1 million total). If you pay $10 per share for those 100,000 shares, you would have paid $1 million to own your 10% stake in the business. In general, this would entitle you to receive 10% of the profits earned by XYZ. Someone who paid $10 per share to purchase all one million shares of XYZ would own all of XYZ for a total cost of $10 million.
The total number of shares a company has been divided into (one million shares in this case) would be referred to as one million shares outstanding. The total cost of buying every share ($10 per share times the total of one million shares outstanding or $10 million) would be referred to as the company’s total market capitalization or total market value.
If you know the share price and how many shares the ownership of a company has been divided into (shares outstanding), you can then figure out the total market value of a company. If the total market value of a company is $10 million and you believe the company is actually worth $20 million, that might indicate an attractive investment opportunity.
How do you figure out how much a company is worth? Be patient. It’s the first day of class for Pete’s sake! But keep reading…there’s plenty to learn and pretty much everyone would benefit from understanding this stuff.
Glossary of Terms
Shares are simply units of ownership in a company. Shares represent equity in a company, so once you own a share, you own a part of the company.
Shares outstanding are all of a company’s stocks held by its shareholders. Shares outstanding also include officers or insiders (share blocks that are held by an organization that invests money on someone else’s behalf, known as an institutional investor).
Also known as market cap, total market capitalization is simply the value of all the company’s shares. It’s easy to calculate: multiple the price of one stock share by the total number of outstanding shares.
Total Market Value is often used interchangeably with the term Total Market Capitalization.