Loading the player...
A:

A company's worth - its total value - is its market capitalization, and it is represented by the company's stock price. Market cap (as it is commonly referred to) is equal to the stock price multiplied by the number of shares outstanding.

For example, a stock with a $5 stock price and 10 million shares outstanding/trading is worth $50 million ($5 x 10 million). If we take this one step further, we can see that a company that has a $10 stock price and one million shares outstanding (market cap = $10 million) is worth less than a company with a $5 stock price and 10 million shares outstanding (market cap = $50 million). Thus, the stock price is a relative and proportional value of a company's worth and only represents percentage changes in market cap at any given point in time. Any percentage changes in a stock price will result in an equal percentage change in a company's value. This is the reason why investors are so concerned with stock prices and any changes that may occur since a $0.10 drop in a $5 stock can result in a $100,000 loss for shareholders with one million shares.

The next logical question is: Who sets stock prices and how are they calculated? In simple terms, the stock price of a company is calculated when a company goes public, an event called an initial public offering. This is when a company will pay an investment bank a lot of money to use very complex formulas and valuation techniques to derive a company's value by determining how many shares will be offered to the public and at what price. For example, a company whose value is estimated at $100 million may want to issue 10 million shares at $10 per share or they may want to issue 20 million at $5 a share.

(For more information on stocks and the factors that influence their prices, please see our tutorial Intro to Fundamental Analysis.)

RELATED FAQS
  1. What's the difference between a capital stock and a treasury stock?

    Learn about treasury capital stock, how to calculate a company's capital and treasury stock, and the differences between ... Read Answer >>
  2. Do stock splits and stock dividends affect stockholder equity?

    Learn about stockholders' equity, stock splits and stock dividends and why stock splits and stock dividends do not affect ... Read Answer >>
  3. What is the difference between market capitalization and shares outstanding?

    Understand the relationship between shares outstanding and market capitalization and how market cap is interpreted to establish ... Read Answer >>
  4. When does a growth stock turn into a value opportunity?

    Learn how fundamental analysts use valuation measures, such as the price-to-earnings ratio, to identify when a growth stock ... Read Answer >>
  5. What is the difference between market capitalization and revenue?

    Understand the definitions of market capitalization and revenue, how each is calculated and how each reflects the value of ... Read Answer >>
  6. How can a company trade more shares in one day than there are shares outstanding? ...

    The number of shares traded in a single day can be greater than the number of a company's outstanding shares, but this is ... Read Answer >>
Related Articles
  1. Investing

    What's A Company’s Worth, And Who Determines Its Stock Price?

    A company’s worth is the same as its market capitalization. Market capitalization is stock price multiplied by number of outstanding shares.
  2. Investing

    Explaining Market Value of Equity

    Market value of equity is the total value of all the outstanding stock as measured in the stock market at a particular time.
  3. Investing

    Getting Acquainted With Treasury Stock

    When publicly traded businesses decided to buy back some of their outstanding shares, it becomes treasury stock. Treasury stock confers no voting rights or dividends, but helps boost shareholder ...
  4. Retirement

    Analyzing The Best Retirement Plans And Investment Options: Stocks

    What they are: Securities that represent ownership in the corporation that issued the stock. Stocks are also called equities. Pros: Capital appreciation; often outperform other investments; ...
  5. Markets

    What's a Small Cap Stock?

    The “cap” in small cap stocks refers to a company’s capitalization as determined by the total market value of its publicly traded shares. Small cap stocks are generally defined as the stock of ...
  6. Investing

    What Are Corporate Actions?

    Be a savvy investor - learn how corporate actions affect you as a shareholder.
  7. Investing

    What are Issued Shares?

    Issued shares are the amount of authorized stocks a company’s shareholders buy and own. The annual report shows the number of outstanding shares.
  8. Markets

    Why Do Companies Care About Their Stock Prices?

    Read on to learn more about the nature of stocks and the true meaning of ownership.
  9. Investing

    What Are Corporate Actions?

    Corporate actions are processes that change a company’s stock. Here are a few examples.
  10. Investing

    Advising FAs: How To Explaining Stocks to a Client

    Without a doubt, common stocks are one of the greatest tools ever invented for building wealth.
RELATED TERMS
  1. Market Capitalization

    The total dollar market value of all of a company's outstanding ...
  2. Outstanding Shares

    A company's stock currently held by all its shareholders, including ...
  3. Earnings Per Share - EPS

    The portion of a company's profit allocated to each outstanding ...
  4. Large Cap - Big Cap

    A term used by the investment community to refer to companies ...
  5. Market Value

    The price an asset would fetch in the marketplace. Market value ...
  6. Market Value Of Equity

    The total dollar market value of all of a company's outstanding ...
Hot Definitions
  1. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  2. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  3. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  4. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
  5. Russell 3000 Index

    A market capitalization weighted equity index maintained by the Russell Investment Group that seeks to be a benchmark of ...
  6. Enterprise Value (EV)

    A measure of a company's value, often used as an alternative to straightforward market capitalization. Enterprise value is ...
Trading Center