Price of a stock doesn’t depend on the size of the company!

Most of you know this fact but I recently came across some people who were asking me why the stock price of such a big company is less compared to that of smaller companies. The fact is that share price doesn’t depend on the size of the company but on the profitability per share of the company and future growth of the company.

If a big company share price is less; that means the number of equity shares are very high and the profits are not up to the mark. In short, fundamentally EPS (Earnings Per Share) is the deciding factor.

EPS = Total Earnings for the year/ number of equity shares ( Including promoter’s Holding)

In the above example the company’s annual profits may be high but if the equity is also very high then the ratio comes down and hence the price. Companies should maintain profitability according to its equity size. A good example is Ispat Industries.

On the other hand for a small company even though the equity base is less if it could generate good profits its price will be higher.

This is the main reason why the share price comes down when rights issue, bonus issue, face splits occur.

There could be another reason for share price movements that is technical. There would be support levels and resistance levels for each stock. When a share price keep on moving northwards at a certain point it refuses to go up that is resistance level, once that is breached there would be one more resistance level and so forth. After over coming a specific resistance level if the share price starts falling this resistance level now acts as support level. Once it breaches this support level the previous resistance level acts as another support level. This is technical in short.

But in a fear driven market ( Now we are in) neither fundamentals nor technicals work!

October 25, 2008 | Filed Under Stocks