Track 1 · Lesson 1 · 5 min
What a stock is, and what sets its price
Shares, market cap and why a $2 stock can be a bigger company than a $400 one. Buy a slice of a real company.
A share (or stock) is a slice of ownership in a company. If a company is cut into a billion shares and you own one, you own a billionth of the business: a billionth of its buildings, its cash, its profits and its debts.
Companies sell shares to raise money, the first time in an initial public offering (IPO). After that, shares trade between investors on an exchange such as the NYSE, Nasdaq or the Toronto Stock Exchange. When you buy a share, your money almost always goes to another investor, not to the company.
Market cap is the price of one share times the number of shares. It is what the market says the whole company is worth, and it is the only fair way to compare sizes. A $2 stock can belong to a bigger company than a $400 stock.
Try it
Buy a slice
Real share prices and share counts from the latest close and company filings. Profit per share is the last 12 months.
Checkpoint
Company A trades at $10 with 1 billion shares. Company B trades at $500 with 10 million shares. Which is bigger?
A is worth $10 × 1 billion = $10 billion; B is $500 × 10 million = $5 billion. Share price alone says nothing about size.
What sets the price? At any moment, the last trade: the price at which one buyer and one seller agreed. Over months and years, prices follow what the company earns and what investors expect it to earn. Over days, they move on news, mood and money flowing in or out.
A handy way to hold both ideas: price = earnings per share × what investors will pay for each dollar of earnings (the P/E ratio). Profits grow slowly; the P/E can swing fast. The valuation lesson picks this up.
What you get, and what you risk. Shareholders earn money two ways: the price rising and dividends, the share of profits some companies pay out. They are also paid last. If a company fails, lenders and suppliers are paid first and shareholders often get nothing, so a stock can fall to zero. That is why debt matters so much, the subject of the balance-sheet lesson.
Check yourself