What is a share?
Put simply, a share refers to a unit of ownership in a company.
By purchasing shares, investors become shareholders and acquire a proportional ownership stake in the company. The ownership stake grants them certain rights, such as voting rights in major company decisions, the right to receive dividends (if the company pays them), and the right to participate in the company's growth and success.
Shares are typically bought and sold on stock exchanges, and their prices can fluctuate based on various factors such as:
Earnings and Profitability: The profitability and earnings of a company play a significant role in determining its share price. Even if two companies have the same market capitalisation, if one company is consistently generating higher profits and earnings, investors may perceive it as more valuable and be willing to pay a higher price per share.
Growth Prospects: The growth potential of a company can greatly impact its share price. If investors believe that one company has stronger growth prospects, such as expanding into new markets, launching innovative products, or benefiting from industry trends, they may be willing to pay a higher price for its shares compared to a similar-sized company with lower growth expectations.
Industry or Sector Differences: Companies operating in different industries or sectors may have varying levels of investor interest and market dynamics. Certain industries or sectors may be in favour with investors due to factors like technological advancements, regulatory changes, or emerging trends. This preference can lead to higher valuations and share prices for companies in those industries.
Investor Sentiment and Perception: Investor sentiment and market perception can greatly influence share prices. Factors like market confidence, news events, analyst recommendations, and investor sentiment towards a particular company can drive share prices higher or lower.
Supply and Demand: The basic economic principle of supply and demand also impacts share prices. If there is higher demand for a particular company's shares compared to its available supply, the share price may rise.
However, it is important to point out that the price of a share does not necessarily reflect the underlying value of the company.
Another common point of confusion for newcomers is why 2 companies that are almost identical in their operations and size can have wildly different share prices. Well, the answer often lies in the number of shares on issue.
For example, let's consider two companies:
Company A has a market capitalisation of $1 billion and has 100 million shares outstanding. The share price would be $10 per share ($1 billion / 100 million shares).
Company B also has a market capitalisation of $1 billion but has 50 million shares outstanding. The share price would be $20 per share ($1 billion / 50 million shares).
So, even though both companies have the same market capitalisation of $1 billion, their share prices are different due to the difference in the number of shares on issue.
However, I reiterate that market capitalisation is just one factor in determining share prices, and the aforementioned factors outlined above also influence share prices independently of market capitalisation.