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A company’s worth, or its total value, is the same as its market capitalization. Market capitalization is stock price multiplied by number of outstanding shares.

If ABC Company’s stock is priced at $5, and it has 10 million outstanding shares, its worth is $50 million. Another company may have $10 stock, but if it only has 1 million outstanding shares, its total value is much smaller than ABC’s.

Any percentage change in stock price will result in an equal percentage change in a company’s value. That’s why investors worry so much about stock prices. A 10-cent drop in a $5 stock doesn’t sound like much, but can result in a $100,000 loss for shareholders with 1 million shares.

Stock prices are calculated when a company goes public. When a business makes an initial public offering, it first pays an investment bank to find its value using complex valuation techniques. The results determine how many shares will be offered, and at what price. If a company’s value is estimated at $100 million, it may issue 10 million shares at $10 per share.

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