Prerequisite: Weakon 135
In my Weakon 135 class we introduced you to the concepts of stock.  We looked at what a stock actually is, and of course what it represents for its owner.  Today I’m going to show you how a stock interacts on the various exchanges, thus determining a value for a share.  We will be using Wells Fargo, a large bank based on San-Francisco as our example.  We will also assume I own 100 shares of Wells Fargo stock (Full disclosure:  Any ownership of Wells Fargo for me is only by way of index funds.  I do not directly own any Wells Fargo stock).

A random 3rd cousin 6 times removed passed away and I inherited his savings in the form of 100 shares of Wells Fargo stock.  I would like to know how much its worth, but where do I start?  Google and Yahoo (among many others) have great finance sites perfect for determining the current value of these shares.  I went to finance.google.com and searched for Wells Fargo.  Google found the company for me and took me to a page with all sorts of information.  What I learned is the trading world deals in ticker symbols, so instead of Wells Fargo they refer to it as WFC.  WFC shares are traded in the New-York Stock Exchange; this is a physical location on Wall Street where stocks are bought and sold.  Its just like what you’ve seen in TV and movies.  Other companies, like Microsoft (MSFT) trade on the NASDAQ, which is an all electronic exchange.  The most important piece of information found on Google Finance is the price per share, which is currently around $25.

Thanks random cousin!  $25 X 100 shares = $2,500.  I could sell these share today and have some nice green in my pocket.  But why is it $25?  Why not $10, or $100?  If I were on the trading floor in New York $25 would be the price other people are buying and selling Wells Fargo stock for, so it would be difficult impossible to sell it for more because no one would buy it.  But that still doesn’t answer why it is $25, who set the price to begin with?  Let’s look at some of the many factors that play into the price of the stock.

The most important factor in the price of stock is the number of shares outstanding.  If there are 1,000 shares outstanding (its closer to 3.3 billion), that means I own 10% of the company with my 100 shares and that the value of the bank is $25,000.  The $25 per share is considered the worth of the company.  If there were 5,000 shares outstanding the value would be more like $5 per share.  So we’ve established how the number of shares impacts the price, let’s follow the yellow brick road to the next step in understanding that $25.

Profit!  We all love profit.  It’s how much money a company makes.  Naturally, the price of a share reflects the profitability of the company.  More profit, higher share price.  This is measured in what’s called the PE ratio.  That is Price per share/ Earnings per share (earnings = profit).  This puts all stocks on the same playing field and allows you to compare apples to apples.

The industry.  Wells Fargo is a bank, which we know makes it not an attractive investment right now.  The uncertainly of the financial services industry has led to the value of all banks going down.

Dividend.  Many banks issue a dividend each quarter.  A dividend is a cut of the profits, issued in terms of per share.  Currently Wells Fargo issues a dividend each quarter of $0.31 per share.  We won’t go into the math involved, but the amount if any dividend issued each quarter to shareholders has a direct impact on the price of a share of stock.  This can be good or bad depending on the state of the company.

Its overwhelming to think of 3.3 billion shares at $25 a pop.  Now think about that is only one of thousands of companies trading constantly.  There are exchanges all over the world trading stocks in companies in their countries.  With all the cross buying over the continents and the constant changing of hands, its easy to see why there is an entire industry devoted to analyzing this activity.

We aren’t done with stocks, not by a long shot.  Weakon 335 and 336 will look into some hard numbers and the philosophies on valuing stocks.  Here’s a hint: not everyone agrees that the price of Wells Fargo should be $25.

Related posts:

1. Weakon 135: Stocks
2. Weakon 305: Mutual Funds, Intermediate
3. Weakon 435: Short Selling
4. Weakon 207:  Diversification
5. Weakon 205: Mutual Funds, Introduction

Related posts brought to you by Yet Another Related Posts Plugin.

Liked this post? Hated this post? Hate me? Email me and let me know: Philip@weakonomics.com