Previous Share Prices

Wednesday, 27th May 2009 11:10 - by Boredmum

When I started investing last year, I would look at the previous share prices for a company as a sign of where they had been and would maybe reach again. This is an incredibly bad idea for a few reasons. Let’s say there had been a share consolidation. This is where a company will consolidate shares either by saying that: o You have 1 share for every 10 you own, but the price goes from 3.2p up to 32p as a direct result (see graph for COO) or; o You have 10 shares for every 1 you own, the price going from £35 down to £3.50 (see graph for GRG). You can see how deceptive the charts would be there. The important thing is the market capital, which is the company value (the amount of shares in operation multiplied by the share value). An example is MEC, with 1.57199 billion shares at 5p giving a market capital of £78.6million (1,571,990,000 x 0.05 = £78,599,500). One particular stock I recall had a share price of about 3p and people were saying ‘this stock has been at 60p. Imagine if it goes to 60p again!’. Well, you do the maths on that and you can see the appeal. The thing is, I didn’t understand the markets and how they work at the time. I knew nothing about market capital and I knew nothing about shares in issue. I don’t know how many shares that particular company had in operation back when the sp was 60p, but I bet it was a lot fewer than they had when the share price was 3p. So what I am saying is that the share price could have been 60p with 16.7 million shares in operation, giving it a market capital of £10 million, and years later they could have issued lots more shares and the share price was 3p, with 333.3 million shares in operation, and the market capital (the company’s worth) would still only be £10 million. As the company wasn’t worth anymore with the extra shares in issue, it would be unlikely to ever see 60p again. The company would have to be worth £200 million to get to a 60p share price again. Please don’t look at previous share prices without taking these things into consideration. It only gives false hope.