{"id":1006,"date":"2012-07-24T23:49:31","date_gmt":"2012-07-24T15:49:31","guid":{"rendered":"http:\/\/www.imoney.my\/?p=1006"},"modified":"2025-04-08T16:29:41","modified_gmt":"2025-04-08T08:29:41","slug":"large-company-high-share-price-you-are-wrong","status":"publish","type":"post","link":"https:\/\/www.imoney.my\/articles\/large-company-high-share-price-you-are-wrong","title":{"rendered":"Large Company = High Share Price? You\u2019re Wrong!"},"content":{"rendered":"

\"A<\/p>\n

Unfortunately, this does not apply to shares.In the world we live in, we are so used to associating the value of a product or service with its price. If something costs more, it usually means it is more valuable.<\/p>\n

Every now and then, you might hear comments about how a particular company is great because it has a higher share price than its competitors.<\/p>\n

This is a myth.<\/p>\n

Here\u2019s the fact: A company\u2019s share price alone tells you nothing about how valuable the company is. Price alone also tells you nothing about the size of a company.<\/strong><\/p>\n

We will not give you a detailed explanation about how a company\u2019s share price is determined (you have Google for that!).<\/p>\n

But to put it really simply, let\u2019s assume you own a debt-free company and it is estimated to be worth RM100 by a collective group of experts whose sole purpose in life is to estimate the value of companies like yours (yeah, they do exist, and they\u2019re usually known as stock analysts).<\/p>\n

Let\u2019s also assume that you\u2019ve had enough of your company. Rather than shutting it down, you decide to give it away to 10 investors.<\/p>\n

One way to do this is by issuing 10 shares, one to each investor. Theoretically, each share would be worth RM10 \u2013 simple math (RM100 divided by 10).<\/p>\n

Now let\u2019s assume, instead of 10 shares, you choose to issue 100 shares. In this case, each investor would receive 10 shares, each worth RM1 \u2013 again, simple math (RM100 divided by 100).<\/p>\n

If you issue 1,000 shares, each investor would receive 100 shares, and each share would be worth RM0.10 \u2013 You get the point.<\/p>\n

Notice how the price of a share has no bearing on the company\u2019s value? Whether it\u2019s RM0.10 per share or RM10 per share, the price reveals nothing about how much the company is actually worth \u2013 RM100 in this case. To estimate the company\u2019s value, you also need to know the number of shares that have been issued.<\/p>\n

Now let\u2019s go one step further.<\/p>\n

Let\u2019s assume that this group of investors thinks your company is really worth RM200 instead of RM100 (Remember, the RM100 company valuation was originally assessed by the experts\/stock analysts).<\/p>\n

In this scenario, paying RM10 for a share \u2013 assuming you only issued 10 shares \u2013 is a huge bargain. Because to the investors, each share should really be worth RM20.<\/p>\n

Of course, there can be many reasons why these investors think your company is worth more than it should (perhaps they know information about your company that the collective group of stock analysts missed, like how the company is close to developing a cure for cancer, or perhaps your group of investors believe with you gone, the company will finally reach its full potential).<\/p>\n

The point is, RM200 is what the investors think your company is worth \u2013 It is a valuation that they have come up with independently, based on their best judgment. It is also an opinion. To the investors, at RM10, the price of your company share is really \u201ccheap\u201d, but as far as the group of stock anlaysts is concerned, RM10 is a fair price.<\/p>\n

So what can we learn here?<\/strong><\/h2>\n

1) The key takeaway is this: the share price of a company alone tells you nothing about the value of a company, because a company can easily manipulate its share price by issuing more or less shares.<\/p>\n

2) Whether a company\u2019s share is expensive or cheap depends on how much you think a company is really worth. So unless you are a seasoned analyst, or know something about the company that the public doesn\u2019t, it\u2019s probably more prudent to assume you don\u2019t know.<\/p>\n

3) We did not touch on this, but to determine the size of a company, the normal convention is to multiply the number of shares issued by the company with its share price (in finance, we call this the market capitalisation or \u201cmarket cap\u201d of a company).<\/p>\n

In the above example, the market cap of your company is RM100 (10 shares issued x RM10 per share, or 100 shares issued x RM1 per share, or RM1,000 shares issued x RM0.10 per share).<\/p>\n

Quiz<\/strong>: So what is the largest company in the world today?
\nAnswer<\/strong>: Apple (at the time of writing), at market capitalisation of US$560 billion.<\/p>\n

See some of Apple\u2019s competitors below, and notice how the share price of each company really tells you nothing about its value or size.<\/p>\n

Apple\u2019s share price = US$603, market cap = US$560 billion
\nGoogle\u2019s share price = US$608, market cap = US$198 billion
\nMicrosoft\u2019s share price = US$29, market cap = US$243 billion<\/p>\n

And just for fun: which company has the highest share price in the world today?<\/p>\n

Answer<\/strong>: Berkshire Hathaway (i.e. Warren Buffett\u2019s baby), at the price of US$124,940<\/strong> per share, market cap = US$206 billion<\/p>\n

 <\/p>\n

(This post originally appeared on\u00a0www.howtofinancemoney.com<\/a>)<\/strong><\/p>\n

Want to get started on trading shares? Find out which broker offers the best rate in Malaysia<\/a>!<\/strong><\/h3>\n","protected":false},"excerpt":{"rendered":"

Unfortunately, this does not apply to shares.In the world we live in, we are so used to associating the value of a product or service with its price. If something costs more, it usually means it is more valuable. Every now and then, you might hear comments about how a particular company is great because… View Article<\/a><\/p>\n","protected":false},"author":1,"featured_media":4406,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_acf_changed":false,"footnotes":""},"categories":[1],"tags":[],"class_list":["post-1006","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-investment"],"acf":[],"yoast_head":"\nLarge Company = High Share Price? You\u2019re Wrong!<\/title>\n<meta name=\"description\" content=\"A large company need not have a high share price. 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