Lessons › Fundamentals and news › Price and value: what a share really is
World 7 · Fundamentals and news · lesson 1 · level 2
Price and value: what a share really is
A share is a small piece of a real business, and its price is what people pay today, which is not always what it is worth.
In one line
A share is a small piece of a real business, and its price is what people pay today, which is not always what it is worth.
Explained simply
Imagine a pizza cut into 1,000 slices, and you own one slice. A share is like that slice of a real business, giving you a small part of its future profits. The price of your slice changes every minute with buyers and sellers, but the pizza itself changes much more slowly.
The lesson
A share gives part-ownership of a company and a claim on a slice of its future profits. The price moves every second with buyers and sellers, while the business's value changes more slowly with its sales, profits and prospects. Fundamental analysis tries to estimate that value, technical analysis studies the price, and many traders use both. Price can stay far above or below value for a long time, so a gap between them is not a timing signal on its own.
A worked example
Illustrative example: company A has 1,000 shares priced at 50, so the market values the whole company at 50,000 (1,000 times 50). Company B has 100 shares priced at 500, also 50,000 (100 times 500), so B's higher share price does not make it more expensive. If you own 10 shares of A, you own 1% of it (10 divided by 1,000 times 100) and a claim on 1% of its future profits.
The same idea at four levels
- Beginner. A share is a small piece of a real business.
- Foundation. Price is what people pay today; value is what the business may be worth, and the two can differ.
- Intermediate. A low share price does not mean cheap: 1,000 shares at 50 and 100 shares at 500 both value a company at 50,000.
- Advanced. Fundamental analysis studies sales, profits and prospects to estimate value, while technical analysis studies price and volume, and many traders combine them.
- Expert. Experts know price can stay far from value for years, so they use value to judge what to trade and the chart to judge when.
Mistakes to avoid
- Thinking a low share price means a stock is cheap.
- Assuming price must quickly return to value; it can stay far away for years.
- Judging a company by its share price without counting how many shares there are.
Check yourself
What is a share?
A small piece of ownership in a company. Shareholders own part of the business.
What is the difference between price and value?
Price is what people pay today; value is what the business may be worth. They can differ, sometimes by a lot.
What does fundamental analysis study?
A company's sales, profits and prospects. It tries to estimate the business's value.
What does technical analysis study?
Price and volume on the chart. It studies how the price moves.
Which usually changes faster, the share price or the business's value?
The share price. Price moves every second with buyers and sellers.
Goal of this lesson: Understand that a share is part-ownership of a business and that price and value can differ.