Granthara01.01.04Why price alone tells you nothing about size0%

01.01.04 · Why price alone tells you nothing about size

One share costs ₹4,000. Another costs ₹50. Almost everyone reads that as a big company and a small one. It is the most common mistake a beginner makes, and it is not a small one.

A ₹4,000 share is not a bigger company

Price is one half of a multiplication. On its own it says nothing.

Part 01 · Ownership, Not Tickers
  1. 01.01.01 What a share of a company is
  2. 01.01.02 Ownership vs lending: equity vs debt
  3. 01.01.03 Authorised, issued, subscribed and paid-up capital
  4. 01.01.04 Why price alone tells you nothing about size
  5. 01.01.05 Market capitalisation
  6. 01.01.06 What a shareholder is entitled to
  7. 01.01.07 What a shareholder is not entitled to
  8. 01.01.08 Limited liability
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Learn

The half that gets left out

A share price is what one slice costs. How big the whole thing is depends on how many slices there are — and companies choose wildly different numbers of slices.

Bharat Foods trades at ₹500 with one crore shares. That makes the whole company worth ₹500 crore. Now take a company whose shares cost eight times as much, ₹4,000, but which only ever issued two lakh of them. The whole of that company is worth ₹80 crore.

Illustrative example
Bharat Foods Ltd
₹500 × 1,00,00,000 shares
The other company
₹4,000 × 2,00,000 shares
₹500 croreBharat Foods, at ₹500 a share
₹80 crorethe other one, at ₹4,000 a share

The cheaper share belonged to the company six times larger.

Learn

Why the slice count varies so much

Nothing forces a company towards a particular price. A business can split each share into ten, and the price falls to a tenth overnight — same company, same assets, same profits, ten times the shares.

If Bharat Foods did that tomorrow, its shares would trade near ₹50 and there would be ten crore of them. Nothing about the business would have changed. Anyone reading the ₹50 as a sign of decline would simply be wrong.

See it

Hold the price still and change the company

The share price below never moves. Drag the share count and watch the company grow and shrink underneath it.

This is why comparing two companies by share price is meaningless. You are comparing one factor out of two.

₹0what a share price alone tells you about a company's size

None of this makes price useless. It tells you exactly what one share costs you today, and that is the number you hand over. It just cannot be compared across companies.

Try it

Company A trades at ₹80 and Company B at ₹1,600. Which is bigger?

The multiplication that fixes this has a name, and it is the number quoted in every headline about a company's size.

Before you read this, which was true?

Remember

A share price is one slice, not the cake. Until you know how many slices a company cut, its price tells you nothing about its size.

Everything this chapter has told you, in order

  1. 01.01.01A share is a small unit of ownership in a real business. Buy one, and your money now rides on how that business performs.
  2. 01.01.02A lender is promised a fixed return and paid first. An owner is promised nothing and paid last, and keeps whatever is left.
  3. 01.01.03Only issued shares exist. The authorised figure is a ceiling the company may never reach, and face value is bookkeeping — not what you pay.
  4. 01.01.04A share price is one slice, not the cake. Until you know how many slices a company cut, its price tells you nothing about its size.
Next
01.01.05 — Market capitalisation

Multiply the two halves together and you get the one number that does describe a company's size.