In this section, I will cover the basic terminology used in business, finanice, stock markets and general investing to aid your understanding.
* Bill Ackman, CEO of Pershing Square Capital Management has produced an outstanding video on finance terminology, which I strongly advise you watch. Take a look here
Lets begin, each publicly listed company (floated on a stock exchange) issues individual shares of their company for the public to purchase a stake. These shareholders (those whom purchase shares of a public company) will now own a small part of the company. You can tell your friends you’re a Business owner.
The total value of your portion in the company can easily be calculated by taking the price you paid for each share (the share price of the company on the stock exchange) X the amount of shares you purchased.
- For example, if you purchased 1,000 shares of Company XYZ and each share cost £5, then the total worth of your portion in the company is £5,000 (1,000 x £ 5).
Similarly, publicly listed companies obtain their market capitalisation ( total market worth) in the same format.
- Lets take Barclays Bank from the London Stock Exchange (Code: BARC), the current share price is £2.35 per share and the total amount of shares outstanding (total amount of shares available on the market) is 17 Billion.
- Therefore, the total market capitalisation for the entirety of Barclays Bank is £ 40 Billion (£ 2.35 x 17 billion).
- Simply put, the stock market is pricing Barclays Bank today at £ 40 Billion for the entire company. (This price changes every day) 📈📉
- So, if you invested £ 10,000 into Barclays bank, you would own roughly 0.000000106% (10,000/£2.35 = 4255 shares /17 Billion outstanding) of Barclays Bank. Probably not enough to encourage a credit limit increase.
Jokes aside, The key for any investor, is to get a firm understanding that the market capitalisation is not definite and is only the stock markets estimation of the total worth of a given company.
As smart, intelligent and vigilant investors, you must come to your own conclusions as to what you believe is the true worth (value) of a given company. This is the Intrinsic value !
Profits are made overtime, when the stock market is selling shares of a company for less then what you believe to be the indicated Intrinsic value (undervalued). And only in these circumstances ! The gap between the markets price and your intrinsic value, is the margin of safety.
Property Investing and Investing in businesses are very similar in certain aspects. One of these aspects includes the rental income a property investor would receive from renting an investment apartment.
A company, also offers such ‘rental income’ to the investor through the form of a dividend payment. Such dividend payments can be used by the shareholders for daily living income (as would a property investor) or they can be re-invested back into the company to maintain growth.
Note: Not all companies will offer a rewarding dividend payment.
I hope you have a slightly better understanding of businesses and stock markets from this short section.
Thank you for reading, remember ‘the more you learn, the more you earn’
Jordonlee W. Smith
* The above post is for informational purposes only, no holdings were made in any of the companies mentioned.