Why Are Some Shares Expensive Than Others?

Why Are Some Shares Expensive Than Others?

Before getting on with this topic, if you want to know about "How is a Share Price determined?", just click here.

We have already written an article on that topic.

Now let's talk about today's topic, Why are some Shares Expensive than Others? 

There are multiple possibilities as to why some stocks are expensive than others, we will try to cover most of the possibilities here in this article. We will list out the possibilities first and then discuss them later in the article.

1. Market Capitalization

2. Stock Split

3. Reverse Split

4. Demand & Supply

5. Fundamentals of the Company

1. Market Capitalization:

We have already discussed this topic in detail in the article "How is a Share Price determined?". So here we'll be discussing it in short.

Market Capitalization is the product of "Number of outstanding Shares" and "Share Price"

So if we re-arrange this formula, we get,

Share Price = Market Capitalization / Number of Outstanding Shares

This shows Share Price is inversely proportionate to Number of outstanding Shares. The more are the number of shares of a particular company in the market the lesser will be its price.

2. Stock Split:

A stock split is a decision taken by the company's board of directors to increase the number of outstanding shares. Thus reducing the share price.

For example in a 2 for 1, if a shareholder has 1000 shares of a company at ₹800 each, after the split the shareholder will have 2000 shares at ₹400 each. So if a company had 10 crore outstanding shares in the market before the split, it will have 20 crore outstanding shares after the 2 for 1 split.

Most of the companies opt for the stock split to keep the stock price in a reasonable range and also to increase the liquidity in the stock.

3. Reverse Split:

A reverse split as the name suggest is the opposite of stock split. In a reverse stock split, the company decreases the number of outstanding shares. Thus increasing the share price.

For example in a reverse 1 for 5 split, if a shareholder has 1000 shares of a company at ₹10 each, after the split the shareholder will have 200 at ₹50 each. So if a company had 10 crore outstanding shares in the market before the split, it will have 2 crore outstanding shares after the reverse 1 for 5 split.

Companies usually opt for the reverse stock split to reduce the volatility in the stock or for gaining more respectability in the market.

4. Demand & Supply:

This is probably the easiest concept in this article. It is based on the standard demand & supply theory.

If the demand is more than the supply or in terms of share market if the Buyers are more than the Sellers the price will be higher.

If the supply is more than the demand, that means if the Sellers are more than the Buyers the price will go down.

5. Fundamentals of the Company:

This is the most important point of all and the shares must be evaluated on this basis.

Fundamental analysis focuses on stock value rather than the stock price, a fundamentally strong stock may trade at a lower price than it's fundamentally weak peers because of the reasons mentioned above. And the goal of an investor should be identifying stocks that are currently undervalued by the market.

Now we hope you have understood "Why are some Shares Expensive than Others".

So we hope now you won't judge a stock/share just by its price. Expensive is not always good.

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