Generally speaking, the stock market is driven by supply and demand, much like any market. When a stock is sold, a buyer and seller exchange money for share ownership. The price for which the stock is purchased becomes the new market price. When a second share is sold, this price becomes the newest market price, etc.
The more demand for a stock, the higher it drives the price and vice versa. Many market forces contribute to supply and demand, and thus to a company's price per share. But what is price per share (PPS stock meaning) and what does it tell us as investors? Let’s find out more:
PPS Stock Meaning
Similar to how consumer goods like automobiles and cell phones come with a price tag, so do shares of stock issued by companies. The price per share, or PPS, is the monetary amount paid or received for a given share of stock. The price per share can help investors decide whETHer a given company's stock is worth buying.
Another way to think of price per share is the market price, or going rate, for the stock in question. Stock prices of publicly traded companies are quoted on public exchanges, so you always have the option of getting the most up-to-date pricing before pulling the trigger on an investment.
The price per share for a company's stock can fluctuate based on the company's performance, as well as market conditions. For example, a company might start off the trading week with a price per share of $20, but if it releases a negative earnings report that same week, then its price per share could drop to $15.
Use Of Price per Share
Price per share is an important figure for investors to consider. In many cases, the decision to purchase or sell a given stock is based on its current price per share. If you're looking to buy a certain stock, you'll want to do so when the price per share is at a relative low, as this gives you the greatest chance of making money on your investment. On the other hand, if you're looking to sell a stock that you currently hold, you generally want to wait until the price per share is higher than the price you paid so that you can make money from the sale.
Market Capitalization
A common mistake among beginning investors is to compare the market price per share between two companies. When Company ABC trades for $10 per share and Company XYZ trades for $1 per share, it may initially seem like Company ABC is more valuable, but that isn't what stock prices tell you. To compare the values of these companies, you'll have to use a measurement known as market capitalization.
The market price per share is used to determine a company's market capitalization, or "market cap." To calculate it, take the most recent share price of a company and multiply it by the total number of outstanding shares. This is a simple way of calculating how valuable a company is to traders at that moment. As with the market price, this value fluctuates with market forces.
When journalists or analysts refer to how much a company is "worth," they're usually referring to market capitalization. If someone owned all the shares of a company, they could hypothetically sell all those shares for that amount.
Returning to the example, let's assume that Company ABC has 1 million shares outstanding and Company XYZ has 100 million shares outstanding. In this case, Company ABC's market cap would be $10 million (1 million shares x $10 per share) while Company XYZ would be worth $100 million (100 million shares x $1 per share). Even though shares in Company XYZ are cheaper, that company is actually worth more, according to the market.
PPS In Financial Calculations
Once you know the price per share for a company's stock, you can use that information to calculate other metrics that can help you determine whETHer the stock in question is a good investment. For example, the P/E ratio, which measures the relationship between a company's price per share and its earnings per share, can indicate whether a stock is overvalued or undervalued.
If a stock is overvalued and you buy it when its price per share is higher than it should be, then you run the risk of losing money. On the other hand, if a stock is undervalued and you buy it when its price per share is lower than it should be, you could end up profiting if the price per share rises to reflect that stock's true value.
Market Price per Share vs. Book Value per Share
Beginning investors may also confuse the market price with book value per share. While market prices fluctuate with investor sentiment, the book value refers to the specific value of an asset. For example, a t-shirt produced by a company may be worth $20, so that shirt's book value is $20.
A company can determine its net asset value by subtracting its debts and liabilities from the total value of all the assets it owns. For a company that makes t-shirts, those assets could include the inventory of shirts, the industrial equipment required to make the shirts, and the property the company owns to store its inventory of shirts. Net asset value may also be called "total equity." Since public companies are owned by shareholders, it may also be called "shareholders' equity."
By dividing a company's total equity by the number of outstanding shares, you can calculate how much of a company's assets each shareholder is entitled to, otherwise known as the "book value per share."
This is useful for investors, especially value investors, because they can compare the book value per share to the market price per share to potentially identify opportunities. This is known as the price-to-book-value ratio. It tells you how much of a company's assets you're entitled to for every dollar you spend on the stock.
Closing Thoughts
In summary, a stock price is a given for every share issued by a publicly-traded company. The price per share is a reflection of the company’s value – what the public is willing to pay for a piece of the company. It can and will rise and fall, based on a variety of factors in the global landscape and within the company itself.
If you’re looking to get started with investing, understanding PPS stock meaning is a great way to start your journey. As you learn more fundamental analysis techniques and tools, you’ll soon be able to analyze a stock and determine if it’s well worth an investment!
