Calculating Common Stock Value

Stock traders establish prices based on opinions.

Stock traders establish prices based on opinions.

At its most fundamental level, calculating common stock value is easy -- just plug a ticker symbol into any search engine, and the most current price will pop up. You'll get a price, but it might not be the stock's actual value. There are three ways of looking at the worth of a share of common stock, and its market price is just one of them.

Market Value

When you look up the price of share of common stock, you're getting its market value. The market value tells you what a competitive pool of buyers and sellers will pay for that share of stock. It's really a summary of an opinion. Your stock's market value is equal to what people in the market think it's worth, regardless of what it may be able to do or what it represents.

Book Values

A stock's book value comes from looking at the total value of the company's assets. If a company has a billion shares outstanding and has $20 billion worth of assets, its book value is $20 per share. This means that each share represents $20 worth of company. The "tangible book value" metric strips intangible items, such as the "goodwill" value of a company's brand, out of book value, and focuses instead on real assets, such as receivables, inventories, and buildings.

Intrinsic Value

A company's intrinsic value is what the money you'll get out of it in while you own it is worth today. When you buy shares in a company, you're giving up money today in exchange for the expectation that you'll sell the stock for money in the future. You might also get some dividends along the line. Its intrinsic value is what that future money is worth to you today. If you believed that you'd sell a share of stock for $20 in three years and would collect $0.75 in dividends while you held it, the investment is worth something less than the $22.25 you'd collect while you owned it. To determine how much less, a calculation for intrinsic value is needed.

Calculating Intrinsic Values

Traditionally, intrinsic values are calculated through a process called a present value. In essence, you take all of the money that you expect to earn and compare it to what you could do with your money if you didn't invest it in the stock. Completing this process gives you the net present value of the investment. For instance, if you knew that you could invest your money at 8 percent, you'd want to pay $17.81 or less for a stock that will pay a $0.75 per year dividend for three years before you sell it for $20. You can calculate this process with a relatively ugly and complex equation, or calculate it more simply by using a function built into most financial calculators and spreadsheets that's called "NPV," which stands for "net present value."

 

About the Author

Steve Lander has been a writer since 1996, with experience in the fields of financial services, real estate and technology. His work has appeared in trade publications such as the "Minnesota Real Estate Journal" and "Minnesota Multi-Housing Association Advocate." Lander holds a Bachelor of Arts in political science from Columbia University.

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