4. What is a Share

What is a share?

A portion of the whole business divided into a certain amount of pieces.

What is Shares Outstanding?

The number of pieces that the company has divided up into.

Comparing terminology between a whole business and 1 share

Whole Business

• Market Price: $100,000
• Income Statement: Net Income of $20,000
• Balance Sheet: Equity of $7,000
• Cash Flow Statement: Taught in course 2

1 Share

• Shares outstanding: 10,000
• Market Price: $10 per share
• Income Statement: Earnings (EPS) of $2
• Balance Sheet: Book Value of $0.70

Basic Valuation Techniques for 1 share

The Price to Earning Ratio: P/E
$$
\frac{P}{E}=\frac{\text{Market Price}}{\text{EPS}}=\frac{$10}{$2}=5
$$

Given the p/e ratio is $x$, for every $x$ dollars I spend buying this stock, I should receive 1 dollar in profit a year later.

Why is Stock investing lucrative?

Most people don't understand this concept of share. As share is just a tiny piece of the whole business and is affordable to most people compared to buying a whole business at once, people don't really evaluate whether they're paying more to buy it (i.e., trading in emotion). Once you can grasp this concept concretely, you're doing value investing and get a lucrative position in this field.