# Shares outstanding vs. price



## darkhorse70 (2 October 2014)

Currently trying to create some sort of trading strategy. One of my criteria in filtering stock is share price. It got me wondering, if a companies shares outstanding is half that of another but its price is worth twice as much are they equal. For example tesla is around $250 per share but has 120M shares outstanding. Much less relative to some other stocks. 

My question is, the stock is expensive but not so much if you think of facebook or twitter who have 2x or 4x more shares. Any thoughts?

I was thinking of shorting over proced stocks. Price wise tesla is much more expensive but you own more of the company. So does shares outstanding play a big role in the probability of a move relative to pricing?


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## McLovin (2 October 2014)

And you want to start your own hedge fund?


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## darkhorse70 (2 October 2014)

Haha maybe one day.


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## McLovin (2 October 2014)

Is a $100m company with 100 shares more or less valuable than a $100m company with 1000 shares? That should answer your question.


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## burglar (2 October 2014)

McLovin said:


> Is a $100m company with 100 shares more or less valuable than a $100m company with 1000 shares? That should answer your question.




The mathematics would say the companies are the same, value wise ... but not price wise!

But it is not about mathematics, is it?


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## darkhorse70 (2 October 2014)

Thats what I was thinkink to burglar. Atleast phycologicaly wise atleast 300$ for one share seems more intimidating than 20$. I guess the real question is how much of an impact does outstanding shares have on price.

It was just a thought, one that I hadnt thought of factoring in before.


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## burglar (2 October 2014)

darkhorse70 said:


> Thats what I was thinkink to burglar. Atleast phycologicaly wise atleast 300$ for one share seems more intimidating than 20$. I guess the real question is how much of an impact does outstanding shares have on price.
> 
> It was just a thought, one that I hadnt thought of factoring in before.




Be very, very careful or you will end up a "Value Investor" instead of a trader!

If ever I buy Tesla shares, I will buy a $3,000 lot.
When I buy penny dreads, I buy a $3,000 lot.

I don't even care to do a valuation.
First I'll get asked why I use FCF instead of DCFA.
Then I'll get asked if it isn't more prudent to use EBITDA.

What about NPV & IRR, PEG and EPS?
What estimate do I use for intangibles?

How much safety margin do I allow?
Does the company have a "MOAT"?


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## darkhorse70 (2 October 2014)

Its times like this you wish you had a teacher. I guess ill have to brush that question off to the side. Maybe the answer will float to me when the times right loll.


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## darkhorse70 (3 October 2014)

That makes sense burglar. I guess each is relative to itself and cant be compared to a different stock. Over extended is only based on its previous history not about what its evaluation is compared to another. Well thats my opinion now.


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## burglar (3 October 2014)

darkhorse70 said:


> Its times like this you wish you had a teacher. I guess ill have to brush that question off to the side. Maybe the answer will float to me when the times right loll.




You are on a forum.
You have hundreds of teachers, well maybe that is an exaggeration!


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## McLovin (3 October 2014)

burglar said:


> The mathematics would say the companies are the same, value wise ... but not price wise!
> 
> But it is not about mathematics, is it?




I thought it was. If not, what is it about?


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## burglar (3 October 2014)

McLovin said:


> I thought it was. If not, what is it about?




D&M (deep and meaningful)



> Is a $100m company with 100 shares more or less valuable than a $100m company with 1000 shares? That should answer your question.




Let's call them KLM and NOP

KLM shares are valued at $1Mill each.
NOP shares are valued at $0.1Mill each.

But after a few days trading KLM shares can have risen or fallen by x%

NOP shares can have risen or fallen by y%

Short term, price is decided by auction.
Long term, price oscillates towards true value!

The general principle I was trying to convey is that the price of a share is a pretty arbitrary value.


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## McLovin (3 October 2014)

burglar said:


> D&M (deep and meaningful)
> 
> 
> 
> ...




Well yes. But if they have moved by x% and y% they're no longer $100m companies. The general principle I was trying to convey is that the price of a share is a pretty arbitrary value.

I think you might be reading too much into my first answer, burgs.


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## burglar (3 October 2014)

McLovin said:


> Well yes. But if they have moved by x% and y% they're no longer $100m companies.
> 
> I think you might be reading too much into my first answer, burgs.




I don't mean to be disagreeable.

Well in fact, I do.

Agree the Market Capitalisation has altered, *BUT* how prey tell, did the IV alter?


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## McLovin (3 October 2014)

burglar said:


> I don't mean to be disagreeable.
> 
> Well in fact, I do.
> 
> Agree the Market Capitalisation has altered, *BUT* how prey tell, did the IV alter?




I didn't mention IV. I was only talking about market cap.


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## burglar (3 October 2014)

McLovin said:


> I didn't mention IV. I was only talking about market cap.




In that case, we are both agreeing!


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## pixel (3 October 2014)

What you guys call enterprise value, every stock report lists as Market Cap. That's short for Market Capitalisation and is calculated (that bluddy Maths again!) by multiplying the current share price times number of shares on issue.

That aside, the size of a share's price level - penny, a Dollar or two, 30 bucks or more - has then only psychological meaning. Take Fortescue, FMG.ASX, as an example: Many years ago, when Twiggy Forrest first got that twinkle in his eye, FMG traded at about 4c; only few "serious investors" took note of the penny-dreadful. But some workers and their mates stuck a bit of spare cash in there, buying maybe 100,000 at 4c, which cost $4,000.
When it all got going and the Chinese bought the first shipments, the share price rocketed up towards $100 a pop. By that time, only the very big institutions would buy; few traders and Mum&Dad investors would be interested to buy 40 shares at $100 each. Seems paltry, doesn't it?

So, Twiggy decided on a share split: For each old share, he'd issue ten new ones; the Market did the right thing, mathematically, and revalued each of the new shares at exactly one tenth of the old ones. And Hey Pesto! Mum bought 400 shares at $10 each and "knew" each share was worth ten bucks. 
(Sadly, they didn't stay at that level. Iron ore miners aren't as much in vogue these days. Just ask any AGO, Atlas Iron, holder...)


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## burglar (3 October 2014)

Just to clarify:
The graphic in earlier post, the Forum Buffoon, is me!


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## skc (3 October 2014)

darkhorse70 said:


> Thats what I was thinkink to burglar. *Atleast phycologicaly wise atleast 300$ for one share seems more intimidating than 20$. *




Intimidating to who? People with no money? Or institutions who move stocks? 

Berkshire Hathaway is over $200,000 per share. If you shorted it on the notion that $300 was intimidating...


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## darkhorse70 (3 October 2014)

Skc but isnt the likelihood of a stock worth $4 doubling  more likely rather than  a $300 dollar stock doubling. On that notion I thought the reverse is also true for a short position?


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## McLovin (3 October 2014)

pixel said:


> What you guys call enterprise value, every stock report lists as Market Cap. That's short for Market Capitalisation and is calculated (that bluddy Maths again!) by multiplying the current share price times number of shares on issue.




Just to clarify, enterprise value is actually market cap + debt + minority interests + prefs - cash.


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## McLovin (3 October 2014)

darkhorse70 said:


> Skc but isnt the likelihood of a stock worth $4 doubling  more likely rather than  a $300 dollar stock doubling. On that notion I thought the reverse is also true for a short position?




No.


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## pixel (3 October 2014)

darkhorse70 said:


> but isnt the likelihood of a stock worth $4 doubling  more likely rather than  a $300 dollar stock doubling?




in one word: No!

Here is why:
Apart from the fact that Australia doesn't have $300 stocks, the only determinant is the enterprise value. That is generally set by institutional analysts, who know how many shares are on issue. They will also include company options, assess the likelihood of their being exercised, adding such capital as may be due, then calculate and publish a "fully diluted" target price per share.
Assuming no ulterior motives - as in the analyst's employer intending to buy or sell a substantial parcel of said company - a good analyst should come up with a reasonably fair value that followers may use as a guide whether to buy or sell.
The combined activity of market participants will then determine the effective Market Cap.


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## skc (3 October 2014)

darkhorse70 said:


> Skc but isnt the likelihood of a stock worth $4 doubling  more likely rather than  a $300 dollar stock doubling. On that notion I thought the reverse is also true for a short position?




Why?

Your thinking is all over the place and shows a lack of basic knowledge of the market and capital structure of companies. However, this is how one learns and develops... 

1. Observe and study the market
2. Develop hypothesis to explain behaviour observed
3. Acquire new knowledge and data to check and test hypothesis
4. If hypothesis is valid, try to develop trading strategies around it
5. Repeat step 1

Everytime you go through this loop you learn something new.


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## pixel (3 October 2014)

McLovin said:


> Just to clarify, enterprise value is actually market cap + debt + minority interests + prefs - cash.




Point taken, McLovin 
"you guys" didn't actually use the term "enterprise value", but were talking about a $100M company. 
My bad.


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## McLovin (3 October 2014)

pixel said:


> Point taken, McLovin
> "you guys" didn't actually use the term "enterprise value", but were talking about a $100M company.
> My bad.




No worries, pixel. I probably should have been clearer in my first example because it seems to have confused everyone!


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## darkhorse70 (3 October 2014)

Thanks for the feedback guys. I understand they are valued by analysts etc but the shares usually trade many times the initial value, due to "potential" future earnings etc.

I only said that because a book I read stated that, that was the case probability wise. It was probably reffering to companies who have doubled,tripled,quadripled in value while no fundamentals have changed.

Skc ill screen shot that. I have thousands of hours of backtesting I have to do before I make any assumptions. At the moment they are all hypothesis until proven other wise. 

Thanks guys


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## Trembling Hand (3 October 2014)

skc said:


> Your thinking is all over the place and shows a lack of basic knowledge of the market and capital structure of companies. However, this is how one learns and develops...
> 
> 1. Observe and study the market
> 2. Develop hypothesis to explain behaviour observed
> ...



Can I not just read a book? :aufreg:


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## Value Collector (3 October 2014)

> The mathematics would say the companies are the same, value wise ... but not price wise!
> 
> But it is not about mathematics, is it?






darkhorse70 said:


> Thats what I was thinkink to burglar. Atleast phycologicaly wise atleast 300$ for one share seems more intimidating than 20$. I guess the real question is how much of an impact does outstanding shares have on price.
> 
> It was just a thought, one that I hadnt thought of factoring in before.




Only in the same way as having a $100 note seems like more than 5 x $20 note.

You can't tell anything about a companies value from share price alone, it always must be tied back to shares on issue.

eg Berkshire Hathaway class A shares are worth $206,000 per share. But they are more undervalued than some shares trading at $20.00.

On Tuesday Berkshires class A went up by $1,350 which was a rise of 0.68%, it's all relative. 

If I told you one bag of potatoes was $5 and another $10, you can't tell me which one is a good deal or a complete rip off unless you find out how many potatoes are in each bag.


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## Julia (3 October 2014)

McLovin said:


> No worries, pixel. I probably should have been clearer in my first example because it seems to have confused everyone!



No, you didn't confuse everyone at all.

dh, there's an old saying:  something about trying to run before you can walk.


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## Value Collector (3 October 2014)

burglar said:


> Be very, very careful or you will end up a "Value Investor" instead of a trader!
> 
> 
> 
> ...




I don't think that would be a bad thing, He obviously has a lot to learn, and understanding / learning more about how companies are valued and how it affects market price doesn't seem like a thing he should avoid.


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## skc (3 October 2014)

Value Collector said:


> Only in the same way as having a $100 note seems like more than 5 x $20 note.
> 
> If I told you one bag of potatoes was $5 and another $10, you can't tell me which one is a good deal or a complete rip off unless you find out how many potatoes are in each bag.




Two very eluquent analogies!



darkhorse70 said:


> Thanks for the feedback guys. I understand they are valued by analysts etc but the shares usually trade many times *the initial value*, due to "potential" future earnings etc.




Did you mean intrinsic value?



darkhorse70 said:


> I only said that because a book I read stated that, that was the case probability wise.




So the book took a study of all the lower priced stocks (say under $10) vs all the higher priced stocks (over $300?) and found there's a statistical edge in the former rising more than the latter? Over what time frame? In which market? 



darkhorse70 said:


> Skc ill screen shot that. *I have thousands of hours of backtesting I have to do before I make any assumptions. *At the moment they are all hypothesis until proven other wise.




Make assumptions first, validate later. In validation you will learn whether the assumption you've made is correct. Validation can be back tested, forward tested, logic tested etc etc. And in doing the validation you might find new relationships. Initially your assumptions may be way off the mark, but overtime they should improve as you home in on what actually matters.

By all means read books etc to give you ideas. Afterall, one would hope that what is stated in the book is in fact based on market observations (or may be even analysis). 

P.S. Darkhorse, may I congratulate you on much improved posting on the forum... e.g. sentences, paragraphs, general manner and attitude displayed. It makes people much more willing to respond.


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## burglar (3 October 2014)

Value Collector said:


> I don't think that would be a bad thing, He obviously has a lot to learn, and understanding / learning more about how companies are valued and how it affects market price doesn't seem like a thing he should avoid.




It is definitely not a bad thing ... if that's how you are wired up.


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## darkhorse70 (3 October 2014)

Thanks for the feedback guys. Points taken. If I was going to reply individually on every ones feedback it would take ages on my phone. I guess I should of acted more professional SKC. My bad.

Skc the book I read it in was technical analaysis of stock trends by Edward and Magee. The photo below is where it claims cheaper prices stocks are more volatile. Obviously there are other factors other than price alone that make up the end result.

 But since it mentioned price as a factor when selecting stock I was thinking about a price range to set as a hypothesis. My immediate conclusion was an expensive stock which had run doubped/trippled would be "more" likely to start to move slower. Then I asked the question. if were going to compare prices then I was assuming that it would have to be relative to shares outatanding.


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## burglar (3 October 2014)

skc said:


> ... and found there's a statistical edge in the former rising more than the latter ...




No matter what you find:
The edge when rising is well cancelled during falling.
I love volatile shares ... 
the pump of adrenaline ... 
but they halve and quarter faster than they double and redouble.


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## DeepState (3 October 2014)

skc said:


> 1. Observe and study the market
> 2. Develop hypothesis to explain behaviour observed
> 3. Acquire new knowledge and data to check and test hypothesis
> 4. If hypothesis is valid, try to develop trading strategies around it
> ...




Well hello Mr/Dr/Prof Deliberate Expertise Development. Awesome par excellence. Something for another thread, if you want to pursue. Got some questions about the application of this concept in investment environments in contrast to low uncertainty environments.


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## So_Cynical (3 October 2014)

DeepState said:


> Well hello Mr/Dr/Prof Deliberate Expertise Development. Awesome par excellence. Something for another thread, if you want to pursue. Got some questions about the application of this concept in investment environments in contrast to low uncertainty environments.




Why do you consistently want to complicate everything with layers of crap.


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## DeepState (3 October 2014)

So_Cynical said:


> Why do you consistently want to complicate everything with layers of crap.




Dunno.  Because it works?  That's probably a crap answer.


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## burglar (3 October 2014)

And I was going to apologise for being rude yesterday.


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## Julia (3 October 2014)

So_Cynical said:


> Why do you consistently want to complicate everything with layers of crap.




Could you say why RY's comments were 'crap'?
Seemed to me a positive and interesting response to SKC's post designed to further the discussion.


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## skc (3 October 2014)

darkhorse70 said:


> My immediate conclusion was *an expensive stock *which had run doubped/trippled would be "more" likely to start to move slower.




3 things

1. By expensive stock you actually meant a stock with a high share price. Expensive = share price much higher than it's value. High share price = a high numerical dollar value per share. Use the right term so your mind isn't confuse between the two.

2. A stock with high share price and a stock that had doubled/trebled are two different things again.

3. Without specifying timeframe, a stock the had doubled/trebled would probably move just as quick if not quicker imo. 

Anyhow, I didn't read the pages you've attached (they were too hard to read), and I am not here to criticise what's right or wrong in the book you've read. I just offered some questions for you to find your own answers.



DeepState said:


> Something for another thread, if you want to pursue. Got some questions about the application of this concept in investment environments in contrast to low uncertainty environments.




Which other thread? I am a crap investor, and I am uncertain as to what you meant by uncertain environments...



So_Cynical said:


> Why do you consistently want to complicate everything with layers of crap.




Because ignorance is a bless? It rhymes!


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## KnowThePast (3 October 2014)

In theory there is no difference between theory and practice; in practice there is.

In theory, a $100m company is worth the same regardless of how many shares it is divided across.

In practice, taking companies in the lowest 10% of the market (by share price alone) will tend to result in a list heavily skewed towards smaller, more speculative companies. And they will be more volatile. 

And the same true at the other end, taking companies with the highest share prices will usually produce a list of companies with large capitalization.

Whether this kind of whole market average is of use to anyone is another question.


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## DeepState (3 October 2014)

skc said:


> Which other thread? I am a crap investor, and I am uncertain as to what you meant by uncertain environments...




That's crap. You are an unbelievably good trader and I'd like very much to learn as much as you are willing to shed, even if what you have to share isn't complicated.  A new thread has now been established as "Becoming better at X" in the Beginner's Lounge.  Hope to see you there. For you, I'm buying.


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## burglar (3 October 2014)

Here is one that tripled today! ASX: SXX Southern Cross Expl.

Trade History						
Security	Date	Open	High	Low	Close	Volume
SXX	02/10/2014	0	0	0	0.001	0
SXX	01/10/2014	0	0	0	0.001	0
SXX	30/09/2014	0.001	0.001	0.001	0.001	300,000
SXX	29/09/2014	0.002	0.002	0.001	0.001	3,494,712
SXX	26/09/2014	0	0	0	0.002	0
SXX	25/09/2014	0.002	0.002	0.002	0.002	893,200
SXX	24/09/2014	0.002	0.002	0.002	0.002	1,074,610
SXX	23/09/2014	0	0	0	0.002	0
SXX	22/09/2014	0	0	0	0.002	0
SXX	19/09/2014	0	0	0	0.002	0
SXX	18/09/2014	0	0	0	0.002	0
SXX	17/09/2014	0.002	0.002	0.002	0.002	325,390
SXX	16/09/2014	0.002	0.002	0.002	0.002	50,100
SXX	15/09/2014	0.003	0.004	0.003	0.004	2,563,249
SXX	12/09/2014	0.004	0.004	0.003	0.003	8,356,000
SXX	11/09/2014	0.005	0.005	0.005	0.005	200,000
SXX	10/09/2014	0	0	0	0.004	0
SXX	09/09/2014	0	0	0	0.004	0
SXX	08/09/2014	0	0	0	0.004	0
SXX	05/09/2014	0	0	0	0.004	0
SXX	04/09/2014	0.004	0.004	0.004	0.004	1,327,100
SXX	03/09/2014	0.003	0.003	0.003	0.003	600,000
SXX	02/09/2014	0	0	0	0.004	0
SXX	01/09/2014	0	0	0	0.004	0
SXX	29/08/2014	0.004	0.004	0.004	0.004	223,000
SXX	28/08/2014	0.003	0.003	0.003	0.003	1,200,000
SXX	27/08/2014	0.004	0.004	0.003	0.003	49,357,586
SXX	26/08/2014	0.004	0.004	0.003	0.003	2,250,000
SXX	25/08/2014	0.003	0.004	0.003	0.004	550,000
SXX	22/08/2014	0.005	0.005	0.003	0.004	1,949,899


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## darkhorse70 (3 October 2014)

Thats what I meant SKC. I should have been more clear. But point taken. Im currently coming up with a trading strategy. Rather than start and test one factor individually, im just adopting strategies from famous traders. Combining suitable ones then combining it. Then I will trade with it and see what the results are. Then individually test them and tweak them. Well thats the plan.

Thanks knowthepast.


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## So_Cynical (4 October 2014)

Julia said:


> Could you say why RY's comments were 'crap'?
> Seemed to me a positive and interesting response to SKC's post designed to further the discussion.




Err who said RY's comments were crap? ill quote myself.



			
				Me said:
			
		

> Why do you consistently want to complicate everything with layers of crap.




The vast majority of topics to do with stock investing/trading require little explanation IMO.


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