A market price for shares of common stock is the amount of money investors are willing to pay. The price of shares rises and falls in response to investor demand. Aside from the obvious fact that the price determines how much a share will cost you, it is also very useful – when combined with other information – to calculate market value ratios and decide if a stock is a good investment. Other information you need is available on financial reports issued by publicly traded companies, which can be found in the investor relations sections of these companies' websites.
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Market Value per Share
The current market price or market value per share of common stock is always the last price at which shares were sold. Strictly speaking, market prices aren't calculated. Instead, they are arrived at through the give and take of buyers and sellers responding to market forces. These market forces affect economic conditions, changes in government policy, news about the company and even the stock's own price trend. According to economic theory, the market price tends to move toward an equilibrium point at which the number of sellers, or supply, equals the number of buyers, or demand. If the number of buyers should increase, the price will trend upward. Conversely, if the number of buyers falls or the number of sellers increases, the price tends to fall.
It's important to distinguish between market price and the book value per share of common stock. Book value is the accounting value of shareholders' equity after the company's liabilities are subtracted from assets as listed on the firm's balance sheet. Book value per share of common stock is calculated by deducting the value of any preferred stock from shareholders' equity and dividing the amount remaining by the number of common shares outstanding. For example, if a firm has $200 million in equity after deducting the value of preferred stock, and 10 million shares outstanding, the book value works out to $20 per share. Market price is not tied to book value, and is often very different.
Market Value Calculation
Normally, you simply look up the current market price quote of common stock. Sometimes, you may need past market prices, but these may not be readily accessible. This can happen when you are researching a stock and need to know how the price has changed over time. You can use the price/earnings ratio to calculate a historical market price estimate. The P/E ratio is a widely used measure calculated by dividing the market price on a given date by the earnings per share for the accounting period. To estimate the market price for the date, look in the company's annual report for the accounting period for the P/E ratio and earnings per share. Multiply the two figures. For instance, if the P/E ratio is 20 and the company reported EPS of $7.50, the estimated market price works out to $150 per share.
Market Value Ratios
A number of financial ratios use the market price per share of common stock. Investors often rely on these ratios to assess whether a stock is overvalued or if it is undervalued – and therefore may offer an opportunity to buy the stock at a bargain price.
Here are two examples:
The P/E ratio is the most widely used market price ratio. It tells you how many dollars you must invest to get $1 in earnings. The P/E ratio is best used to compare companies within the same industry. For example, tech firms may offer high growth rates, so investors will pay more for the shares; high P/E ratios don't always indicate the stock is overvalued. Conversely, a utility may offer stable earnings, but limited growth. A company in this industry usually has a relatively low P/E ratio.
The price to book value ratio tells you how much equity you acquire for each dollar invested. P/BV is calculated by dividing the market price by the book value of common stock. For example, a stock with a price of $100 per share and a $50 book value has a P/BV of 2. Many investors believe that a P/BV of less than 1 indicates the stock may be a bargain. However, you should look closely at other indicators, like earnings per share, to be sure the low price really is a bargain and not a warning sign that the company is having problems.
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Based in Atlanta, Georgia, William Adkins has been writing professionally since 2008. He writes about small business, finance and economics issues for publishers like Chron Small Business and Bizfluent.com. Adkins holds master's degrees in history of business and labor and in sociology from Georgia State University. He became a member of the Society of Professional Journalists in 2009.
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Adkins, William. 'How to Calculate Market Price Per Share of Common Stock.' Small Business - Chron.com, http://smallbusiness.chron.com/calculate-market-price-per-share-common-stock-3396.html. 26 November 2018.
Adkins, William. (2018, November 26). How to Calculate Market Price Per Share of Common Stock. Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/calculate-market-price-per-share-common-stock-3396.html
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A company’s “earnings available for common stockholders” is the profit it has left over at the end of an accounting period after covering all expenses and paying dividends to preferred stockholders. Common stockholders pay close attention to this figure and to a company’s earnings per share, or EPS, because these numbers represent their cut of the profits. When your small business generates strong earnings available for common stockholders and EPS, you potentially increase the value of your company’s common stock.
Common Stock Earnings Formula
Earnings available for common stockholders equals net income minus preferred dividends. Net income, or profit, equals total revenue minus total expenses. Revenue is the money you earn selling products and services. Expenses are the costs you incur in the same period, such as rent, payroll, interest and income taxes. Preferred dividends represent the portion of profits you distribute to preferred stockholders. Although preferred stockholders receive dividends before common stockholders, they do not share in the rest of the profits; only common stockholders do.
How To Calculate Common Stock OutstandingCalculation Example
Assume your small business generates $2 million in total revenue during the year, has $1.7 million in total expenses and pays $20,000 in preferred dividends. Your net income equals $2 million in revenue minus $1.7 million in expenses, or $300,000. Your earnings available for common stockholders equals $300,000 in net income minus $20,000 in preferred dividends, or $280,000. How to mod ps4 fallout 4. This means each common stockholder has a claim on this $280,000 in proportion to the number of shares he owns. If there are 1,000,000 shares, the earnings per share is 28 cents a share. If a stockholder has 1,000 shares, he has earned $280. Stockholders could elect to reinvest the earnings to improve the profitability of the company.
Uses of Earnings
Although common stockholders technically own the earnings available to them, a business does not necessarily distribute all of this profit. You can choose to pay out a portion of these earnings as dividends to common stockholders and retain the rest, or you can reinvest the entire amount in your business. Using the previous example, your small business might decide to pay out $60,000 as dividends to common stockholders and plow the remaining $220,000 back into your business. This is a business decision that is contingent on a growth strategy or a retention strategy. The early years of a company are usually very growth oriented.
Earnings per Share
You can also calculate your earnings available for common stockholders on a per-share basis – your earnings per share. Earnings per share equal earnings available for common stockholders divided by the number of common shares outstanding. This figure reveals the earnings to which each share of common stock is entitled. Using the above example, assume you have 560,000 shares outstanding. Your earnings per share is 50 cents, or $280,000 divided by 560,000. This means you generated 50 cents of earnings for each share of common stock.
Preferred Stock Earnings
Preferred stock owners don't have voting rights and are similar to bond owners with a fixed dividend paid. This is a higher class of investment compared to common stock. Preferred stock is always paid its dividend prior to earnings calculated and paid to common stock owners. Not every company has preferred stock owners so there are times when common stock earnings is based strictly on the net earnings of the company. A company may establish both preferred and common stock contingent on different offers to investors.
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Keythman, Bryan. 'Formula for Calculating the Earnings Available for Common Stockholders.' Small Business - Chron.com, http://smallbusiness.chron.com/formula-calculating-earnings-available-common-stockholders-58179.html. 12 December 2018.
Keythman, Bryan. (2018, December 12). Formula for Calculating the Earnings Available for Common Stockholders. Small Business - Chron.com. Retrieved from http://smallbusiness.chron.com/formula-calculating-earnings-available-common-stockholders-58179.html
Keythman, Bryan. 'Formula for Calculating the Earnings Available for Common Stockholders' last modified December 12, 2018. http://smallbusiness.chron.com/formula-calculating-earnings-available-common-stockholders-58179.html
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Don’t forget to account for dividend reinvestment. The process above is designed to work for relatively simple cases where the number of stocks owned is a fixed quantity. However, in real life, investors often use the dividends they earn to buy more shares of stock in a process called 'dividend reinvestment.' By doing this, an investor sacrifices a short-term dividend payout in favor of the long-term gains that can result from owning added shares. If you've arranged for a dividend-reinvestment program as part of your investment, keep an updated tally of shares you own so that your calculations will be accurate.[4]
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