A market price per share of common stock is the amount of money investors are willing to pay for each share. The price of shares rises and falls in response to investor demand. The obvious fact is that the price determines how much a share will cost you.
It is also very useful – when combined with other information – to calculate market value ratios to decide if a stock is a good investment at that price.
The other information you need is available on financial reports issued by publicly traded companies, which can be found in the investor relations sections of these companies' websites.
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The market value per share formula is the total market value of a business, divided by the number of shares outstanding.
Market Value per Share
The current market price or market value per share of common stock is always the last price at which shares were sold. Strictly speaking, market prices aren't calculated. Instead, they are arrived at through the give and take of buyers and sellers responding to market forces.
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According to economic theory, the market price tends to move toward an equilibrium point at which the number of sellers, or supply, equals the number of buyers, or demand. If the number of buyers should increase, the price will trend upward. Conversely, if the number of buyers falls or the number of sellers increases, the price tends to fall.
It's important to distinguish between market price and the book value per share of common stock. Book value is the accounting value of shareholders' equity after the company's liabilities are subtracted from assets as listed on the firm's balance sheet.
Book value per share of common stock is calculated by deducting the value of any preferred stock from shareholders' equity and dividing the amount remaining by the number of common shares outstanding.
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For example, if a firm has $200 million in equity after deducting the value of preferred stock, and 10 million shares outstanding, the book value works out to $20 per share. Market price is not tied to book value, and is often very different.
Market Value Calculation
Normally, you simply look up the current market price quote of common stock. Sometimes, you may need past market prices, but these may not be readily accessible. This can happen when you are researching a stock and need to know how the price has changed over time.
You can use the Price/Earnings (P/E) ratio to calculate a historical market price estimate. The P/E ratio is a widely used measure calculated by dividing the market price on a given date by the earnings per share for the accounting period. To estimate the market price for the date, look in the company's annual report for the accounting period for the P/E ratio and earnings per share. Multiply the two figures.
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For instance, if the P/E ratio is 20 and the company reported EPS of $7.50, the estimated market price works out to $150 per share. In other words, this is the price you would expect to pay per share if all other factors were equal.
Market Value Ratios
A number of financial ratios use the market price per share of common stock. Investors often rely on these ratios to assess whether a stock is overvalued or if it is undervalued – and therefore may offer an opportunity to buy the stock at a bargain price.
Here are two examples:
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The P/E ratio is the most widely used market price ratio. It tells you how many dollars you must invest to get $1 in earnings. The P/E ratio is best used to compare companies within the same industry.
For example, tech firms may offer high growth rates, so investors will pay more for the shares. In this case, a high P/E ratio doesn't always indicate the stock is overvalued. Conversely, a utility may offer stable earnings, but limited growth. A company in this industry usually has a relatively low P/E ratio.
The price to book value ratio tells you how much equity you acquire for each dollar invested. P/BV is calculated by dividing the market price by the book value of common stock.
For example, a stock with a price of $100 per share and a $50 book value has a P/BV of 2. Many investors believe that a P/BV of less than 1 indicates the stock may be a bargain. However, you should look closely at other indicators, like earnings per share, to be sure the low price really is a bargain and not a warning sign that the company is having problems.
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