What is a share price?

You can buy a share today in Google for US$568.24. That’s US$7.34 more than it would have cost you yesterday, and more than US$100 more than it would have cost you in March, but US$150 cheaper than at the start of this year.

Or, maybe a share in Apple for US$187.01 or Microsoft for US$28.18.

Or, if you prefer kiwi companies, a share in Air New Zealand for $1.08, Fletcher Building for $7.60 or Contact Energy for $9.11.

Or, if you like, a share in Xero for 85c.

Do those prices represent good value or not?

Q: What is a share price?

I’m interested to hear your answers…

21 thoughts on “What is a share price?”

  1. ahh the questions the questions:

    What is a market?
    What is a fair valuation?
    Does fundamental analysis work?
    Do chartists make money?
    What is the value of an invested portfolio?
    Is wrestling fixed?
    What is the right price for the NZD?

    Even a Finance PhD won’t answer these questions coherently, but it will provide for much longer answers.

  2. It would very interesting to know the net asset backing of some of these companies and compare that to the share price. I suspect a huge premium for brand value and future earnings potential in some cases.

  3. What is a share price? A market’s perceived value (which is an aggregation of individual’s perceived values?) of a portion of a company.

  4. I’d like to know how to buy shares? Can I buy just 1, or is there a minimum number you have to buy at once? Can I buy any shares at any time, or do I have to wait for someone to want to sell their shares? How do I buy shares for overseas companies? How do I sell my shares once I’ve bought them? Can I just sell them at any time – what if nobody wants to buy them?

    Those probably seem like simple questions to all of you who dabble in the stock market, but not when you’re just starting out.

  5. Stuart, I know where you’re coming from! When I went to invest in Xero, I had the sudden ‘erm… How?’ moment.

    I think IPO’s are different and they had some broker arrangement – but I agree the whole thing is VERY confusing for new players and is a rather large barrier to involvement.

    Rowan, I know there are complex equations, but whenever I hear about the sharemarket, it seems to be more of a psychological game than anything else:

    1. Xero – HYPE! When we bought in, we bought into the story of what could be and the reputation of the people behind it. Even though Xero had little ‘real’ information, the potential was pretty impressive… And when the IOP closed and everyone started panicking they missed out on the next big thing, the prices rose even more as everyone clambered to get in.
    2. Air NZ – Our confidence in a national carrier and the reputation for it being somewhat of a lame duck means the shar price seems to be heavily influenced by outside things.

    But I don’t really know, I’m more clueless than Stuart, but want to get involved :)

  6. ok, heres my take…
    price of a share is irrelevant (unless talking about berkshire class As!). Its the ‘value’ of the company, divided by the number of shares.

    Value is basically how much money people think the company is going to make them.

    eg: imagine 2 companies, both ‘valued’ at 1,000,000. Now company A has 1000 shares, which would be priced about $1000 each (ie value/num shares). Company B has 1,000,000 shares, priced about $1 (val/num-shares).

    The share price is vastly different, but the company value is the same. So price is pretty much irrelevant.

    How do you buy shares? I use the National Bank share trading website. ASB have a share trading site, i imagine the others do too.

    Which shares to buy? :-) I buy for different (often terrible!) reasons. Eg, I bought Telecom because I hated Telstra so much. Bad decision! I bought apple because I like my mac so much and noticed that Dick Smith and Noel Leeming were selling them. Good Decision!

    But its kinda tricky. Index funds might be the answer. An index is a collection of companies (eg NZSE50 – top 50 biggest companies on NZ market) and buying one share in an index fund buys you a tiny little piece of each of those companies. I use Motley Fool, which are a US share picking company, mainly to get exposure to companies I have never heard of, doing interesting things in the states.

    But its kinda fun too! drop me a note if u want further explanation so I don’t mess up Rowans blog too much..

  7. This week we have launched a new NZX website which was developed with an aim of making sharemarket much more accessible to retail investors.

    On the site there are investment basics(http://nzx.com/investing), a “locate a broker tool”(http://www.nzx.com/investing/find_a_broker) and also portfolio and watchlist tools (http://www.nzx.com/my_nzx)so investors can monitor the shares they have invested in or are thinking about investing in.

    Feedback appreciated & questions welcome

  8. Ok this in 2 parts…
    As mentioned before a share price is merely the value of a company divided by the amount of shares the company has issued.

    So what is the VALUE of that company?

    Investors in traditional (offline) companies look at numbers and assets (e.g. company has X assets, Y revenues, Z profits or earnings).

    From there the traditional valuation is either 6 times revenues or 12-15 times earnings.

    This is where perception kicks in…
    If a company is making money, but is loaded with high debt and bad clients, then some investors may feel it is actually worth less than 12 times earnings.

    On the other hand, if a company has a high growth rate (like many technology and dotcom companies), then some investors may feel it is worth more than 12 times earnings.

    Either way it’s all about what investors think, based on the information available.

  9. The tricky part comes in with stock markets and publicly traded companies.

    With so many people buying or selling a company’s stock, things can get crazy. It now becomes more about following the crowd, than it is about the company.

    So as the crowd loves Google in May, the price goes up. Even though that crowd didn’t like Google in January. Has Google changed much since January…not really. It’s all about the perception of the crowd.

    This is where great investors like Warren Buffett separate themselves. They perpetually try to look at the true value of the company and how well it is doing. And try to ignore the markets (or the crowd) as much as possible. Thus ensuring that they never overpay for a stock or company.

    So, What is a stock price? In a formula:
    Perceived Company Value/Total Shares = Share Price

    The trick is to get the perceived value right. :-)

  10. @Dan:

    You can find out the net assets for each of these companies using a site like Yahoo Finance (find the company you’re interested in, then click on “Key Statistics” on the right hand side).

    e.g. http://finance.yahoo.com/q?s=goog

    Looking at the three tech stocks I quoted in my original post, the net assets of each are:

    GOOG: $77.57
    AAPL: $20.48
    MSFT: $4.03

    So, in all three cases the share price includes an estimate of future earnings as well as the current assets of the business.

    What assumptions are the people buying and selling at the current prices making?

  11. @Koz:

    True, the price of a single Berkshire A-class share is far more than most investors could afford.

    But, if you look at the ratio of share price to the earnings per share over the last 12 months, you get a slightly different picture:

    BRK.A: 17.7
    GOOG: 40.3

    So, which is overvalued?

  12. @Stuart, @Natalie

    The stock market is just that … a market. There a buyers and sellers. And the price is whatever they agree between themselves.

    You can buy as many shares as you like, provided there is somebody willing to sell that many at the price you’re willing to pay. When you hear a share price quoted in the newspaper and on the TV etc it is normally the price of the most recent transaction or the price at which shares are currently offered for sale.

    As Koz points out, if you’re interested in buying into Warren Buffet’s company, Berkshire Hathaway, at nearly US$130,000 per share you may need to save up! But, most other shares are priced in a way that allows you to buy and sell even small amounts.

    The person who hooks up a buyer and seller is called a “broker”. Brokers normally charge a fee for each transaction, so that can also influence how often you want to trade, and the amounts. If you’re buying and selling small amounts of shares the fees can become a significant amount in comparison. Different brokers charge different fees, so it can pay to shop around and find one that suits you.

    Lucy from the NZX, in her comment, linked to a page on their site which has lots of good information for beginners:
    http://nzx.com/investing

    They also have a list of all of the brokers who are registered with the NZX:
    http://www.nzx.com/investing/find_a_broker

    Of course, once you’re set up to buy and sell, then the more difficult question is: how do you decide which shares to buy? In other words, how do you decide if a companies share price at a given point in time represents good value or not? I’d be interested to get your thoughts.

    PS good on you for asking these questions – I suspect that you’re part of the large majority who are completely confused by all of this stuff, but you differentiate yourselves by being willing to put your hand up and admit it. :-)

  13. @Greg:

    Buying index funds is certainly a popular choice. But, this simply means that you’re buying a very small portion of each of the companies in the index, for example, if you by the NZX50 index you are effectively investing in the 50 largest companies listed on the NZX:
    http://www.nzx.com/markets/indices/NZ50

    The amount you get of each company in this case is usually in proportion to the size of the company relative to the others in the index (so slightly more of the bigger companies).

    You still buy, or sell, at a given price. So, you still need to answer the question: how do you decide if that price represents good value for money or not?

    Interested in your thoughts.

  14. @Chad:

    So, is it a game of trying to guess what other people will be willing to pay in the future? That seems impossible – given how quickly sentiment can change.

    Warren Buffet famously said that in the short-term the market is a popularity contest, but in the long-term is a set of scales (which cannot be so easily fooled, as I discover each time I weigh myself!)

    In other words, the companies that do well over the long-term at the companies that are fundamentally good, and whose current market prices under-represents their fair long-term value.

    But what does that mean?

  15. A friend told me that around 30% of all trading is actually done algorithmically by hedge-fund types, which certainly doesnt leave much slack for the average joe, er Greg.

    The problem with value is that you (individually) never know exactly what constitutes the market valuation at any given time. And, my feeling is in general, you really have no idea whether its a good price or not. And no way of telling.

    So, given we have no idea and no way of working out what a ‘good’ price is, aren’t we a bit stuffed? Well… a bit, yes. My strategy? I use advisors like Motley Fool, whose business model pretty much relies on a certain level of success, and my “feel”, particularly with technology. At least, win or lose, I learn something about what other companies are doing, which is always fascinating.

    Otherwise, maybe its time for an angel investing fund, where every member puts in 10K, and uses it to fund dodgy start-ups!

  16. FWIW you can buy BRK.B shares – which let you own a piece of Berkshire Hathaway at a fraction of the BRK.A price – a mere $4000 odd. I’ve got a couple of B shares, and wish I had a “few” A shares :-)

  17. Correct, it is impossible to guess people’s sentiment. Buffett wants you to always buy companies on the cheap, based on fundamentals.

    What does it all mean? – There are entire books on this, but I will try to do it less words.

    “Fundamentally good” to Buffett usually means two things:
    1. Solid numbers (healthy profits, low debt, etc).
    2. Great “intangibles” (great products, great markets for those products, proven management, stable business environment).

    If a company is selling at less than 12 times earnings today, then that is a good start for ensuring that you are getting a company whose “current market prices under-represents their fair long-term value”.

    So what will that long-term value be? To use a simple calculation…If a company is making $1 million in earnings/profits today, and earnings are growing at 20% per annum. Then it’s pretty easy to work out what the company should be making after say 5 years:

    $1,000,000 x 1.20…x1.20…x1.20…x1.20…x1.20 = $2,488,320

    Thus, in five years the company should be worth:
    Earnings $2,488,320 x 12 (times earnings) = $29,859,840

  18. However numbers are just that…numbers. So often what determines whether or not a company realizes it’s potential are the “intangibles”.

    Therefore
    – If the company has a great product that you believe people will be want for years to come, then that’s one plus.

    – Then if you think that company has a management team that really knows their stuff, manages the firm and the staff well, and have been doing it consistently for many years, then that’s another plus.

    – Finally, if you think the business environment should be stable, then that is a critical plus as well. Because no matter how good the company is, if the industry or economy goes to hell, so too will the stock prices.

    (This is why Buffett does not like to invest in businesses that operate in highly regulated environments, because one day the regulators may change the rules and render your top product illegal! And this is also why it is important to invest in solid economies (for years Buffett refused to invest outside of the US – as he said he knew and understood the US environment)).

    So..What does it all mean?
    Look for companies that are selling at a discount today, have great “intangibles”.

    Naturally, there is more it than what I have outlined. But hopefully this has helped a bit.

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