#3 The Share Price

Share price is the single most important thing that makes a shareholder jump, dance, run cry, laugh, commit suicide or whatever. It is therefore apt to discuss this first.

Most simply, (and perhaps most efficiently) if the market(the overall share investors) values a company at Rs. 10,00,00,000 and the number of issued shares are 10,00,000 then the share price will be 10,00,00,000/10,00,000 = Rs. 100. This said, is not necessarily the prevailing market price. The price fluctuates on every news and every event that directly or indirectly affects the company's earnings.

Another way is the normal demand-supply arguement that applies to all commodities. Shares of a company are treated as a commodity and the changes in the price depends on the demand-supply scenario at a particular time.

Share price is the direct function of the earnings of the company and many many other factors. These factors could run in 3 digits if ennumerated. I will try to list some important ones in a later post.

One thing that is necessary to understand is that even the management might not be able to value its own company properly, forget analysts and share holders!!! Sometimes the Projected earnings (and hence the share price targets) vary by more than 100% by different analysts at a point in time!!! Does this mean that there is no hope in the markets unless one gambles? The answer is that the risks are always there, even in the best companies, but these can be minimised by 'Portfolio Diversification' and by 'Systematic Investment Plans'. These are at the second stage and I will try to discuss these topics after I have covered some of the more basic topics.