Stock Pricing: Apple Crosses $1 Trillion and Still Trades Lower than ManyAugust 3rd, 2018 by Tanner Wrisley
If you are going to invest in stocks, it is important to know how their pricing works. Understanding what is really behind those numbers that scroll across the bottom your favorite business news station, helps one make more informed investment decisions. And how come stock price is not directly correlated with the company’s size? Apple is the biggest company in the world and yet its stock price is certainly less than others? Allow me to explain.
Many people understand that when you buy a share of a company’s stock, you are buying a tiny portion of that company. In other words, you become a partial owner. What many people do not realize is that stock prices are not solely determined by the company’s profit. In fact, quite frequently, companies will see their stock price go down after reporting great earnings growth. This is because stocks are priced based upon expectations and the value that other investors feel it deserves. In other words, the price of a stock is what investors are willing to pay for it. When you see that Microsoft’s “price” is $107.50, what that really is telling you is the price at which the last trade occurred.
Company profits and earnings growth are definitely part of that value, but let’s create a hypothetical: Say ABC stock currently trades at $50/share. The company expects $1 million in profits at the end of this year and last year its profits were only $500,000. If at the end of the year, ABC reports a profit of $850,000, the stock will most likely go down. Even though they had significant growth from the previous year, it was less than investors were expecting. Those expectations were already assumed in the price of $50, so when the assumptions are not met, the market will adjust for that.
Why do some bigger companies have smaller stock prices? It has to do with the number of shares outstanding the company has. The total value or market capitalization for a company takes the current price per share and multiplies it by the total number of outstanding shares. Apple has the largest market capitalization in the world, passing $1 trillion on Thursday with the stock trading at $207. At the same time, Amazon’s stock was priced at about $1,800 and yet their market capitalization is less. This means Apple has more shares out in the market than Amazon. Companies can issue new shares, buy back shares, and split shares which results in a differing number of shares from company to company.
When deciding whether to buy stock from a specific company or not, it helps to think about the dynamics of what is really going on. It is best to consider not only the possible success of the company, but also what other investors are thinking. They are the ones deciding what price you are going to be able to buy and sell at. Earnings and profits are important factors in determining price, but investors will always get the final say.