Village builders

Block 7: Price vs. Value

Let’s go back to Wonderscape (WNDR). You bought one share at $12 and now it stands at $13. Technically, you can go around bragging that you own a part of your uncle’s business (just don’t mention to your friends that you only own 1/20 millionth of it). Your ownership is 1/20 millionth because there are 20 million outstanding shares of Wonderscape and you bought one. When you multiply this number by the price of a single WNDR share, you get the market capitalization or the market’s value of the company. So 20 million (# of shares) x 13 (price) is 260 million dollars. This is what everyone, or the market, says Wonderscape is worth.

 

This is not to say value and price are the same thing. Value is what you get, price is what you pay. Let us explain. The price of a share of WNDR is $13. However, if you think Wonderscape could grow more and become more valuable you’ll be happy to pay $13. If, in a year, Wonderscape shares are at $20, you got a great value at $13.

 

Price is what people are willing to pay right now, but the value is what you get. For instance, you buy a car for $10,000 and it lasts you 20 years and you have no mechanical issues you got a great value. The value was probably greater than the price of $10,000. This is a key concept when it comes to buying stocks. You’re looking for an eventual greater value than the price you pay. When you buy shares of stock in a company, you’re effectively saying, “I believe this company will be more valuable in the future.” You are searching for return! Now it’s coming full circle huh?

 

Let’s say you buy Wonderscape shares for $12 and sell them in a year for $15. Ignoring taxes, you made 25%! This is your return. And this is the stock market: a collection of publicly traded businesses where investors are vying for return. But this begs the age-old question, which stocks should I buy? It’s not that easy but let’s find out…