Share price misconceptions

People often believe that a company's share price tells a lot about it. For instance, many retail investors buy penny stocks because they are assumed to be cheap or might help them get more shares. But do share prices reflect a company's actual value? Let's find out. Myth 1: Share price reflects the size of a company Many investors attribute share price as the correct indication of a company's size. We could not think of a better example to burst this myth than comparing Reliance Industries , the largest Indian conglomerate, and MRF, the company with the highest price per share. While the shares of Reliance Industries and MRF currently trade at Rs 2,351 and Rs 1,09,000, respectively, Reliance's market capitalisation is about 35 times that of MRF. Market capitalisation is the company's total value or the amount that an investor has to pay to buy 100 per cent shares of that company. The vast difference in the share price of both these companies is a result of the number of shares issued. At present, Reliance has more shares outstanding than MRF. As a result, its market capitalisation is higher than that of MRF. Myth 2: Share price tells whether a company is cheap or expensive If one had to compare the share prices of Bajaj Auto and TVS Motor in the two-wheeler space, one might think Bajaj Auto is a more expensive company to buy. But to check whether a stock is expensive, investors must look at valuation metrics such as price-to-earnings (P/E) and price-to-book value (P/B) rather than the share price alone. Valuation metrics TVS Motor trades at an expensive valuation when compared with Bajaj Auto Share price

This article was originally published on October 25, 2023.