For a casual market observer, the market price per share is the number that’s listed alongside the ticker symbol of a given stock. When a trader places a market order to buy or sell a stock, it will execute at the market price.
Supply and Demand Impact Market Price per Share
Unlike the book value per share, the market price per share has no specific relation to the value of the company’s assets or any other balance sheet information. Instead, the market price per share is influenced by supply and demand. When more people are trying to buy a stock than sell it, the market price will rise. When more people are trying to sell a stock than buy it, the market price will fall. These actions may be driven by company assets, such as good or bad news released in a quarterly earnings report. Supply and demand can also be driven by non-financial factors, such as controversy about a CEO, new laws from the government, or natural disasters. Since many casual investors do their trading through a brokerage app or website, it’s easy to lose sight of the fact that each order you tap into your app is actually a real trade with another person. Digital tools have streamlined the process, but traders still need to find a partner to execute the order—a seller needs to find a buyer, and a buyer needs to find a seller. In technical terms, a seller offers an “ask” price at which they’re willing to sell, and the buyer offers a “bid” price at which they’re willing to buy. When the bid and ask prices meet, it creates a market price, and the trade is executed. When market forces push down the price of a stock, a seller may be willing to settle for a smaller ask price, and the market price falls. Conversely, when market forces push the price of a stock up, a buyer may be willing to pay a higher bid price, and the market price rises.
Market Capitalization
A common mistake among beginning investors is to compare the market price per share between two companies. When Company ABC trades for $10 per share and Company XYZ trades for $1 per share, it may initially seem like Company ABC is more valuable, but that isn’t what stock prices tell you. To compare the values of these companies, you’ll have to use a measurement known as market capitalization. The market price per share is used to determine a company’s market capitalization, or “market cap.” To calculate it, take the most recent share price of a company and multiply it by the total number of outstanding shares. This is a simple way of calculating how valuable a company is to traders at that moment. As with the market price, this value fluctuates with market forces. Returning to the example, let’s assume that Company ABC has 1 million shares outstanding and Company XYZ has 100 million shares outstanding. In this case, Company ABC’s market cap would be $10 million (1 million shares x $10 per share) while Company XYZ would be worth $100 million (100 million shares x $1 per share). Even though shares in Company XYZ are cheaper, that company is actually worth more, according to the market.
Market Price per Share vs. Book Value per Share
A company can determine its net asset value by subtracting its debts and liabilities from the total value of all the assets it owns. For a company that makes t-shirts, those assets could include the inventory of shirts, the industrial equipment required to make the shirts, and the property the company owns to store its inventory of shirts. Net asset value may also be called “total equity.” Since public companies are owned by shareholders, it may also be called “shareholders’ equity.” By dividing a company’s total equity by the number of outstanding shares, you can calculate how much of a company’s assets each shareholder is entitled to, otherwise known as the “book value per share.” This is useful for investors, especially value investors, because they can compare the book value per share to the market price per share to potentially identify opportunities. This is known as the price-to-book-value ratio. It tells you how much of a company’s assets you’re entitled to for every dollar you spend on the stock.
