If CSX railroad has 40 million shares outstanding and is trading for 50.00 a share does that mean the Railroad as a company is worth 2,000,000,000.00 and that if you add up the value of all of its Locomotives,Rolling Stock and Real Estate you will come up to roughly that number?
The value of a company share of stock is based on the confidence of investors buying or looking to buy that particular stock on an open market. This confidence is based somewhat on the equity of the company but mainly on what return the buyer will get on his investment. He’s more concerned about the timing of the purchase as relates to future growth of the company, its products, and how dividends are determined based on the company’s performance. In mass purchases for the intent of taking over a company or being a majority owner the assets are now a more important issue. In most cases the stock price is merely a form of consumer confidence or lack of.
A company issues stock as way of creating working capital. For example they want $100, so they issue 100 shares of stock at $1.00 each assuming all will be sold and they get their money. This money reportedly will be used to improve operations. Now comsumer confidence dictates the value of that stock as it is traded from investor to investor. At this point the issuing company is out of the picture and the investor has to do his homework to assure he is not wasting his money. If the common stock drops below the $1.00 initial offering, thats on him not the company.
PS: I did really well when I owned Conrail stock and bidding war began!
The number of shares outstanding refers to the number of shares in circulation…ie… CSX may have 40 million shares outstanding…which altogether equate to 100% ownership of CSX. So if you own one share of CSX you in affect own 1/40 millionth of the company… and if you were to own 20 million of those shares you would have 50% ownership of the company.
Sometimes railroads and other companies will “buy back” their own shares, thereby decreasing the number of shares outstanding. The end result is often a higher price per share and less “outside” ownership involvement in the company. Conversely, companies will issue more shares i.e. increase the number of shares outstanding, in order to raise needed capital or in order to bring down the price per share to a more affordable level.
Yes - that is commonly referred to as 'Market Capitalization". It primarily depends on what the market = investors think the shares are worth, however they may choose to determine that figure in a given set of circumstances - there’s more than 1 way or basis for doing that.
No - their value can be determined in at least 3 ways:
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Replacement cost = what it would cost to buy them all new today;
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Book value = their historical cost to buy or build, minus the sum of their accumulated “depreciation” amounts;
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Fair market value = what a buyer would be willing to pay for each item in today’s market.
If you think about your own or friends’ of family member’s personal experiences with buying and selling cars and/ or houses, etc., you can probably see most of the parallels easily enough. As always, if you want to know more, Internet searches using these terms should find what you’re looking for.
- Paul North.
Look at it this way-people who invest in stocks are buying what they consider to be the future earning potential of the company they invest in. The owner will benefit when dividends are paid, and/or as the value of the company increases due to earnings being retained by the company. If a company has a million dollars worth of assets but no prospect of earning money going forward (all they manufacture are buggy whips) they are worth the liquidation value of the assets. If the company is making a hot new product with a brilliant future (think cold fusion reactors that generate nearly free electricity) they have great earning prospects and the stock price will be based on that projected stream of future earnings.
BNSF is seen as a well-managed company in a captial intesive business. Compare them with Microsoft-another company seen as well managed, but not in a capital intesive business. BNI’s book value per share is about $36.00, MSFT book value per share is about $4.60. Berkshire Hathaway felt that BNI was worth about $100 per share, or 2.7 times book value. Investors currently feel that MSFT is worth about $27 per share, or nearly 6 times what the book value of the company is.
Adding up the asset value of the company only gives you what it is worth in liquidation-the point of management is to use the assets in such a way that they generate more income than buying and using them costs. That’s why people are willing to pay above book value-it is believed that the assets will produce more profits than they cost to replace as they wear out. Obviously this is a simplified explanation but hopefully explains the reason that you can’t just assume the market capitalization is the same as the asset value. I haven’t even dipped into how various financing types (debt vs. equity, common stock vs. preferred) affect the numbers.
Jim
Let’s say a RR offers stock at $10 a share and someone buys a share. Essentially they’re loaning the railroad $10, in the expectation that the railroad will pay them dividends, which is in effect interest on the loan. There is also the possibility that they may be able to sell the stock later for more than the $10 they paid.
If the RR’s dividends are $2 a year, in five years the buyer has made his money back. However before that time someone may offer the buyer say $15 for his share. Essentially the new buyer is buying the future interest (dividends) and betting that he may later sell the stock for more than $15. If the company is going good, the stock could eventually sell for $100 a share or more, based on strong dividends and expectation of even higher stock prices.
But the railroad wouldn’t have all that money, since they only got the original $10 from the original buyer. Of course, if the railroad could issue more stock at the higher price, or may have bought back their old $10 stock at some point in the past, and now they could re-sell them at the higher rate.
Buffet/Hathaway is smart to go for 100% ownership stake as that gives him maximum control and say in the affairs of the business. Owning a small share of a business gets you no say in it, and all you’re really doing is placing a bet on the future prospects of the business… call it educated gambling based on what you see and read. I try to invest in things I can have direct control over…I would thus sooner own 100% of a small business than .0000000001% of a large corporation.