How Are Shares Valued?

Shares in the stock markets have a value that keeps fluctuating. You might have noticed while monitoring the trends that these values keep on increasing or decreasing continuously when doing shares online trading. Now the question is what the drivers of these values are. What determines the value of shares or stocks? Let us probe more on this to find out the answers.


To understand this, we will need to first learn a term called the Earnings per share or EPS. In simple mathematical terms, it is the ratio of the profits of the company to the number of shares. For example, if a company say X, has 40 billion rupees in profits and has sold 200 million shares, then the EPS will be Rupees 20/share. Therefore, if you are the owner of one share of the company X, then you are entitled to receive Rupees twenty of company X's profits for this year.

Calculating the Price of the Share follows some mathematics, which is pretty simple. Let us check that out:
To calculate how much you would need to spend for that 1 stock of company X, you will find the sum of all the earnings, you will make out of the shares of this company -

        So, Stock Price = EPS in the 1st Year + EPS in the 2nd Year + EPS of 3rd Year and so on...

Further, we all know that the value of one rupee earned in the first year is not the same as the value of one rupee earned after ten years. This is because there is always an interest rate say 'r', which will apply and the money, which will be available after ten years would be of less value the money that you have now. Thus, we will need to revise the formula.

        Therefore, Stock Price = ((EPS in Year 1) / (1+r))+ (EPS in Year 2 / (1+r)^2) + ...

Hence, this involves a lot of mathematical calculations involving the formula of compound interest. Let us simplify this and discuss the conclusion of this exercise.

1. For a company that does not grow as expected:

          The stock price = EPS / Interest rate

2. For a company that has a steady growth rate:

           The Stock price = EPS of next year / (Interest rate - Growth rate expected for the company)

3. The Market Estimation:

Keeping an eye on the market dynamics and the performance of a company helps you to estimate how its products or services are doing in the market. This will also help you to estimate the value of the share.

Estimating the worthiness of shares is art rather than a science. It requires a good foresight and a keen eye on the stock market. It helps you to invest wisely and ultimately gain from it. However, it is not always a win-win situation, and you should stay prepared for mixed response from the market to begin with. Once you get experienced in the market behavior and invest long term, then it is definite that you will start reaping benefits soon enough.

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Milan Tomic

Hi. I’m Designer of Blog Magic. I’m CEO/Founder of ThemeXpose. I’m Creative Art Director, Web Designer, UI/UX Designer, Interaction Designer, Industrial Designer, Web Developer, Business Enthusiast, StartUp Enthusiast, Speaker, Writer and Photographer. Inspired to make things looks better.

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