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How is the Value of Shares Determined?

Jim B.
Jim B.

There are many different methods that investors may use to determine the value of shares that they hold in a company as an investment. Many of these valuations are based on statistical models that determine the company's actual, or intrinsic value, as opposed to its current market price. Other methods of determining the value of shares project those statistics into the future to estimate what their value will be worth if the investor holds on to them. Some investors may prefer to evaluate subjective factors like company leadership or the effect of current events on the market when measuring the worth of shares.

Shares in a company represent a portion of the ownership in that company. For example, a person who has 50 shares of a company that issues 50,000 shares has what is essentially a thousandth ownership interest in that company. That number is meaningless unless it can be determined what that interest in the company is worth. Market prices can give some reflection on the value of shares, but investors usually dig deeper to try and find the actual worth of their shares regardless of what the market says.

Woman holding a book
Woman holding a book

To determine the value of shares, statistical ratios are often used comparing some aspect of the company's value to its market price. These ratios are crucial because they can help to distinguish if a company is being either overvalued or underrated by the current market price. For example, a company may have a low earnings ratio, which means that the market price is not indicating how well the company is performing. An investor holding shares in this company may find them to be more valuable than what the market price indicates.

Ratios that can be projected into the future can also be very useful when assessing the value of shares. For example, if a company projects high earnings in the future, this can mean that their shares will be worth more accordingly at that time. Shares of stocks that promise dividends, which are bonus payments made out to investors, also would have higher valuation levels to reflect those payments.

Investors who don't wish to rely solely on statistics may also measure the value of shares they own in a particular company using the analysis of factors that can't be reduced to numbers. A company with poor earnings and a dwindling stock price could rebound based on the hiring of new leadership. By contrast, a company that's seemingly doing well could be due for hard times because of a regulatory decision in the works that could drastically affect business. Savvy investors often use a combination of real-world events and statistical models for the valuation of shares.

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