What makes an actual share valuable? [duplicate]
"What benefit do I get from buying a share The value of any financial asset is its ability to generate cash in the future, and thus the ""value"" of a share is heavily influenced by the dividends it pays and the equity value.  The equity value can be calculated different ways. Two common ways are to just take ""book"" value, meaning assets - liabilities, or you can look at the projected free cash flows of the company discounted back to the present time. Voting rights don't typically influence a share price except in hostile takeover scenarios (meaning someone buys up a lot of shares to have more influence in company decisions)"
Let's use an example: You buy 10 machines for 100k, and those machines produce products sold for a total of 10k/year in profit (ignoring labor/electricity/sales costs etc). If the typical investor requires a rate of return of 10% on this business, your company would be worth 100k.  In investing terms, you would have a PE ratio of 10.  The immediately-required return will be lower if substantially greater returns are expected in the future (expected growth), and the immediately required return will be higher if your business is expected to shrink. If at the end of the year you take your 10k and purchase another machine, your valuation will rise to 110k, because you can now produce 11k in earnings per year.  If your business has issued 10,000 shares, your share price will rise from $10 to $11.  Note that you did not just put cash in the bank, and that you now have a higher share price. At the end of year 2, with 11 machines, lets imagine that customer demand has fallen and you are forced to cut prices.  You somehow produce only 10k in profit, instead of the anticipated 11k.  Investors believe this 10k in annual profit will continue into the forseable future.  The investor who requires 10% return would then only value your company at 100k, and your share price would fall back from $11 to $10.  If your earnings had fallen even further to 9k, they might value you at 90k (9k/0.1=$90k).  You still have the same machines, but the market has changed in a way that make those machines less valuable. If you've gone from earning 10k in year one with 10 machines to 9k in year two with 11 machines, an investor might assume you'll make even less in year three, potentially only 8k, so the value of your company might even fall to 80k or lower.  Once it is assumed that your earnings will continue to shrink, an investor might value your business based on a higher required rate of return (e.g. maybe 20% instead of 10%), which would cause your share price to fall even further. "Generally, a share of stock entitles the owner to all future per-share dividends paid by the company, plus a fraction of the company's assets net value in the event of liquidation.  If one knew in advance the time and value of all such payouts, the value of the stock should equal the present cash value of that payout stream, which would in turn be the sum of the cash values of all the individual payouts. As time goes by, the present cash value of each upcoming payout will increase until such time as it is actually paid, whereupon it will cease to contribute to the stock's value. Because people are not clairvoyant, they generally don't know exactly what future payouts a stock is going to make.  A sane price for a stock, however, may be assigned by estimating the present cash value of its future payments.  If unfolding events would cause a reasonable person to revise estimates of future payments upward, the price of the stock should increase.  If events cause estimates to be revised downward, the price should fall. In a sane marketplace, if the price of a stock is below people's estimates of its payouts' current cash value, people should buy the stock and push the price upward.  If it is above people's estimates, they should sell the stock and push the price downward.  Note that in a sane marketplace, rising prices are a red-flag indicator for people to stop buying.  Unfortunately, sometimes bulls see a red flag as a signal to charge ahead.  When that happens, prices may soar through the roof, but it's important to note that the value of the stock will still be the present cash value of its future payouts.  If that value is $10/share, someone who buys a share for $50 basically gives the seller $40 that he was not entitled to, and which the buyer will never get back.  The buyer might manage to convince someone else to pay him $60 for the share, but that simply means the new buyer is giving the the previous one $50 that he wasn't entitled to either.  If the price falls back to $10, calling that fall a ""market correction"" wouldn't be a euphemism, but rather state a fact: the share was worth $10 before people sold it for crazy prices, and still worth $10 afterward.  It was the market price that was in error. The important thing to focus on as a sane investor is what the stock is actually going to pay out in relation to what you put in.  It's not necessary to look only at present price/earnings ratios, since some stocks may pay little or nothing today but pay handsomely next year.  What's important, however, is that there be a reasonable likelihood that in the foreseeable future the stock will pay dividends sufficient to justify its cost." But how valuable is it in the Star Trek world? How much gold is available and how much do they need?Are there alternatives? Will they ever find another element that replaces it? These all affect the actual value...  Nothing has value without demand, so how can anything be intrinsically valuable? I have a hard time giving them a P/E higher than 25 on the absolute top end. Given current numbers, that takes another ~60% off their share price putting them right around $10. Now... that's my top end estimate, I'd probably be willing to buy right around $8.  In order to support the IPO price, the models I've seen come in at projecting an average growth rate of 40% YoY for the next 5 years. If FB pulled that off, they'd be growing ~5X over the next 5 years (once compounded). As it stands, they've got 900B+ users. Doubling that would require a significant number of new people to start coming on line - 5x that would be impossible.  So... next option... They figure out how to monetize existing users/traffic better. It's possible - they don't do a very good job with this as it stands, but they've got a fine line to walk. They need to pull it off without driving users, or advertisers, away.  Suppose they were able to double their user base. They'd still need to do ~2.5x better per user to make the numbers. This doesn't take into account that the next billion users are significantly less valuable as an audience than the first billion. (Not in human terms, but in financial/marketing terms.)  I'm willing to give them a 20% growth rate for the next 5 years. That'd put them at a bit better than 2.5x over that time. It's still a stretch. That should put them in the same P/E range as GOOG (currently trading at a P/E of 17ish).  Any price higher than $10/share at this point is gambling on their ability to crack monetization. The higher you go, the higher you think the odds are.  One last thing I'd keep in mind. Most of the early employees with options are locked out of selling for the first 6 months after the IPO. There's a fairly large number of shares that will become available when that time is up. I'm curious to see how many of the early employees call in rich and go start new companies. (Think about what happened to paypal after being sold to ebay - yelp, youtube, and others all came out of the early employees.) I'd be watching the quarterly reports through the quarter ending 12/31. The numbers at that point will give a better gauge of a proper valuation. I absolutely wouldn't hold shares of FB during the period when employees first have their chance to cash their lottery tickets. You can calculate the fully diluted shares by comparing EPS vs diluted (adjusted) EPS as reported in 10K. I don't believe they report the number directly, but it is a trivial math exercise to reach it. The do report outstanding common stock (basis for EPS). It doesn't matter which exchange a share was purchased through (or if it was even purchased on an exchange at all--physical share certificates can be bought and sold outside of any exchange). A share is a share, and any share available for purchase in New York is available to be purchased in London. Buying all of a company's stock is not something that can generally be done through the stock market. The practical way to accomplish buying a company out is to purchase a controlling interest, or enough shares to have enough votes to bind the board to a specific course of action. Then vote to sell all outstanding shares to another company at a particular fixed price per share. Market capitalization is an inaccurate measure of the size of a company in the first place, but if you want to quantify it, you can take the number of outstanding shares (anywhere and everywhere) and multiply them by the price on any of the exchanges that sell it. That will give you the market capitalization in the currency that is used by whatever exchange you chose. A company typically goes public in order to bring in additional capital. In an IPO, the company (through its officials) will typically do so by issuing additional shares, and offering to sell those to investors. If they did not do that, then there would be no net capital gain for the company; if person A sells share in company C to person B, then company C does not benefit directly from the exchange. By issuing and selling additional shares, the total value of all stock in the company can increase. Being publicly traded also greatly increases the confidence in the valuation of the company, as a consequence of the perfect market theory. There is nothing in this that says that initial investors (cofounders, employees, etc.) need to sell their shares in the process. They might choose to do so, or they might not; or they might be prevented from doing so by terms of any agreements that they have signed or by insider trading laws. Compare What happens to internal stock when a company goes public? Depending on specifics, it might be reasonable for the company to perform a share split prior to the initial public offering. That, however, doesn't affect the total value of the shares, only the price per share. Let's say that you bought a share of Apple for $10. When (if ever) their stock sold for $10, it was a very small company with a very small net worth; that is, the excess of assets over liabilities. Your $10 share was perhaps a 1/10,000,000th share of a tiny company. Over the years, Apple has developed both software and hardware that have real value to the world. No-one knew they needed a smartphone and, particularly, an iPhone, until Apple showed it to us. The same is true of iPads, iPods, Apple watches, etc. Because of the sales of products and services, Apple is now a huge company with a huge net worth. Obviously, your 1/10,000,000th share of the company is now worth a lot more. Perhaps it is worth $399. Maybe you think Apples good days are behind it. After all, it is harder to grow a huge company 15% a year than it is a small company. So maybe you will go into the marketplace and offer to sell your 1/10,000,000th share of Apple. If someone offers you $399, would you take it?  The value of stocks in the market is not a Ponzi scheme, although it is a bit speculative. You might have a different conclusion and different research about the future value of Apple than I do. Your research might lead you to believe the stock is worth $399. Mine might suggest it's worth $375. Then I wouldn't buy. The value of stocks in the market is based on the present and estimated future value of living, breathing companies that are growing, shrinking and steady. The value of each company changes all the time. So, then, does the price of the stock. Real value is created in the stock market when real value is created in the underlying company.