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Why Is Market Capitalization So Hard To Understand?

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    Why Is Market Capitalization So Hard To Understand?

    I feel like this simple concept should be grouped with progressive tax bracket, the majority of people just doesn't understand it.

    PSA for all investors.

    The ONLY thing the stock price tells you is the amount required to aquire one share. Nothing more. Investing based on the stock price, and using just the stock price to determined if the company is a good buy or not is completely wrong.

    Please look at the market capitalization when trying to determine how over or undervalue the company is, and the chance of multiplying your money. The stock price doesn't tell you this. Many companies have large market caps but a small stock price. Some has a large stock price but a small market cap. A company with a large market cap and a small stock price does not double or quadruple your money very easily. Apple and Microsoft will not be a 2500 dollar stock just because Amazon is "But how do you know?". I am 1000% certain that Apple will not be worth more than the entire stock market combined.

    Your investment return is tied to a percentage and not the stock price. "Ford is only 7 dollars therefore I can have more shares than Tesla at 1000 dollars" is a stupid reason and need to get this out of your head. The amount of shares does not matter. If both companies had a 10% rally, Tesla ends up at 1100 and Ford ends up at 7.70 will both yield the same exact returns for your money regardless of the amount of shares you own. Ford cannot rally 100 dollars like Tesla so it makes no sense what share amount has to do with anything.

    I have friends who passed Series 7 and still get fixated on the stock price which just blows my mind. He knows what a market cap is, but can't seem to wrap his head around utilizing it when analysing stocks. This goes for everyone I have talked to. And this is why people lose money because of not understanding basic concept 101.

    ​​​​​

    #2
    Very good point.

    I think part of the problem is the barrier to entry for higher priced stocks, though that is beginning to change. Generally, you could only buy whole shares of stock so if someone wants to invest a few hundred dollars, they can't buy one share of Tesla but they can buy 50 shares of Ford. I have seen that fractional share purchases are starting to be a thing so that may alter the investing landscape significantly.

    I think some of this mindset is also based on outdated issues. I'm also old enough to remember when if you didn't buy an even lot of 100 shares, you paid an even higher commission (and commissions back then were already super high) and I think there might have been some brokers who wouldn't even accept odd lot buys. So share price DID matter, especially to the average smaller investor. Not everybody had $10,000 to pick up 100 shares of a $100 stock.

    The last point I'd make is diversification. If you are trying to diversify with individual stock purchases, that's a lot easier if you focus on those with lower share prices. Maybe you can buy 10 shares each of 5 or 6 companies rather than just 1 share each of 2 companies.
    Steve

    * Despite the high cost of living, it remains very popular.
    * Why should I pay for my daughter's education when she already knows everything?
    * There are no shortcuts to anywhere worth going.

    Comment


      #3
      I agree that there are many advantages to a company having a lower stock, however it's is the most misleading metric due to a lack of understanding from the general public. People like to compare similar industries and feel that the overvalued company is the one with the large stock price (and "missed out") and the undervalued one has the small stock price ("still has a chance to catch up"). So many things wrong with that mentality that might as well set your money on fire.

      Comment


        #4
        Originally posted by Singuy View Post
        I agree that there are many advantages to a company having a lower stock, however it's is the most misleading metric due to a lack of understanding from the general public. People like to compare similar industries and feel that the overvalued company is the one with the large stock price (and "missed out") and the undervalued one has the small stock price ("still has a chance to catch up"). So many things wrong with that mentality that might as well set your money on fire.
        I agree completely. There's also the alternative mindset that the higher priced stock must be the more successful company so you should buy that one and avoid the lower priced one.

        Ultimately, the share price really doesn't mean much of anything.
        Steve

        * Despite the high cost of living, it remains very popular.
        * Why should I pay for my daughter's education when she already knows everything?
        * There are no shortcuts to anywhere worth going.

        Comment


          #5
          Yes, looking at share price alone is pretty dangerous.
          There are some barriers to entry with the expensive stocks
          Berkshire Hathaway might be a strong buy, but not too many people could afford even a single share.
          But, plenty of good quality stocks out there that are affordable if you do your homework

          Brian

          Comment


            #6
            BRK.A must be the best stock ever!

            Comment


              #7
              Originally posted by bjl584 View Post
              Yes, looking at share price alone is pretty dangerous.
              There are some barriers to entry with the expensive stocks
              Berkshire Hathaway might be a strong buy, but not too many people could afford even a single share.
              But, plenty of good quality stocks out there that are affordable if you do your homework
              Until they created Brk B Worked for them my whole career and I work the shareholders meeting every year - finally got to add it to my portfolio just last year.

              Comment


                #8
                I totally agree with you if the firm is debt free. I always look at enterprise value which includes the long term debt in the calculation. For instance, I totally agree with your logic of market cap with FVRR relative to other internet names and I see a long term secular trend in its services but as a word of caution under normal federal reserve conditions of virtually little amount of money printing the business cycle would set back hard unprofitable companies given AMZN gave back 98% of its move after the dotcom bubble.

                As for low priced stocks they tend to do better in percentage terms during the beginning of an interest rate cycle and trickle over to larger caps as the cycle ages.

                Comment


                  #9
                  Originally posted by JBinKC View Post
                  I totally agree with you if the firm is debt free. I always look at enterprise value which includes the long term debt in the calculation. For instance, I totally agree with your logic of market cap with FVRR relative to other internet names and I see a long term secular trend in its services but as a word of caution under normal federal reserve conditions of virtually little amount of money printing the business cycle would set back hard unprofitable companies given AMZN gave back 98% of its move after the dotcom bubble.

                  As for low priced stocks they tend to do better in percentage terms during the beginning of an interest rate cycle and trickle over to larger caps as the cycle ages.
                  The dot com bubble in my opinion was the result of the world not understanding how money can be made via the internet (not even the companies themselves). Now with software companies giving the largest return on capital for any investor today, I feel like there will be more money pouring into safe havens like the digital tech sector while taking away from sectors that continue to be decimated by Covid. My portfolio was at an all time high right before the market crash, and now thanks to Covid it has supercharged it to a gain of 15% on top of my ATH prior to the market crash. Investors have a much better understanding of the digital tech sector today than in the early 90s during the early internet phase. In fact many people thought the internet was some kind of fad that may just disappear in the mid 90s. I didn't even know about this sentiment until Kimbal Musk brought it up talking about their early development of contact directories in the mid 90s.
                  Last edited by Singuy; 06-19-2020, 11:07 AM.

                  Comment


                    #10
                    Originally posted by Singuy View Post

                    The dot com bubble in my opinion was the result of the world not understanding how money can be made via the internet (not even the companies themselves).
                    Very true. Heck, even today I wonder about a lot of internet-based businesses, especially those whose services are completely free to the user. It amazes me that they are all able to have viable businesses based solely on advertising revenue. In the 26 years I've been an internet user, I don't think I've intentionally clicked on an internet ad more than 4 or 5 times.

                    This site is a perfect example. How does a site like this generate income? I don't pay anything to participate. They don't sell anything. There are no ads in the forums or blogs (though maybe there are on other parts of the site that I don't visit). Where does the money come from?
                    Last edited by disneysteve; 06-19-2020, 11:34 AM.
                    Steve

                    * Despite the high cost of living, it remains very popular.
                    * Why should I pay for my daughter's education when she already knows everything?
                    * There are no shortcuts to anywhere worth going.

                    Comment


                      #11
                      Originally posted by disneysteve View Post

                      Very true. Heck, even today I wonder about a lot of internet-based businesses, especially those whose services are completely free to the user. It amazes me that they are all able to have viable businesses based solely on advertising revenue. In the 26 years I've been an internet user, I don't think I've intentionally clicked on an internet ad more than 4 or 5 times.

                      This site is a perfect example. How does a site like this generate income? I don't pay anything to participate. They don't sell anything. There are no ads in the forums or blogs (though maybe there are on other parts of the site that I don't visit). Where does the money come from?
                      James is secretly selling all our data

                      Comment


                        #12
                        Originally posted by Singuy View Post

                        James is secretly selling all our data
                        Well, that's probably true. Many internet companies, regardless of what they do on the surface, are actually in the data-gathering business.
                        Steve

                        * Despite the high cost of living, it remains very popular.
                        * Why should I pay for my daughter's education when she already knows everything?
                        * There are no shortcuts to anywhere worth going.

                        Comment


                          #13
                          Originally posted by Singuy View Post

                          James is secretly selling all our data
                          Sometimes the best decision for company longevity is not the most economically profitable decision. If you guys haven't had a chance to check out 'The Innovators Dilemma", its a great book on how rational financial calculations actually can result in long term lost market share.

                          But, we might start sending a forums digest email to help share the SA forums goodness and we might run an ad or two on some of the most popular threads (like "share your wins" or whatnot).
                          james.c.hendrickson@gmail.com
                          202.468.6043

                          Comment


                            #14
                            Originally posted by Singuy View Post
                            I feel like this simple concept should be grouped with progressive tax bracket, the majority of people just doesn't understand it.

                            PSA for all investors.

                            The ONLY thing the stock price tells you is the amount required to aquire one share. Nothing more. Investing based on the stock price, and using just the stock price to determined if the company is a good buy or not is completely wrong.

                            Please look at the market capitalization when trying to determine how over or undervalue the company is, and the chance of multiplying your money. The stock price doesn't tell you this. Many companies have large market caps but a small stock price. Some has a large stock price but a small market cap. A company with a large market cap and a small stock price does not double or quadruple your money very easily. Apple and Microsoft will not be a 2500 dollar stock just because Amazon is "But how do you know?". I am 1000% certain that Apple will not be worth more than the entire stock market combined.

                            Your investment return is tied to a percentage and not the stock price. "Ford is only 7 dollars therefore I can have more shares than Tesla at 1000 dollars" is a stupid reason and need to get this out of your head. The amount of shares does not matter. If both companies had a 10% rally, Tesla ends up at 1100 and Ford ends up at 7.70 will both yield the same exact returns for your money regardless of the amount of shares you own. Ford cannot rally 100 dollars like Tesla so it makes no sense what share amount has to do with anything.

                            I have friends who passed Series 7 and still get fixated on the stock price which just blows my mind. He knows what a market cap is, but can't seem to wrap his head around utilizing it when analysing stocks. This goes for everyone I have talked to. And this is why people lose money because of not understanding basic concept 101.

                            ​​​​​
                            Singguy, help me understand your point. Isn't market share a function of the share price? Market cap = share price x number of outstanding shares? So does that not mean that a company with a larger share price MAY have the larger market cap (although that also depends on how many shares have been "issued") ?

                            Also, could the reason why AAPL & MSFT will be never have share prices as large as AMZN's ($3000+ today) is because both Apple and Microsoft pay dividends but Amazon does not (and will highly likely never pay a dividend)?

                            Can you explain your reasoning / point, please? Thank you.

                            Comment


                              #15
                              Apple did a 7:1 split a few years ago.

                              if they didn’t they would be at around $2590 per share (7 x 370). Theoretically I believe.

                              Comment

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