Stock prices are initially determined by the value of the company and the amount of stocks they want to release. In stock terms, it’s called Market Capitalization or Market Cap. Let me explain it in brief.
Suppose our company Garg-Sen Inc. is of total value Rs. 100 million. Now we want to launch 1 million shares as IPOs. So, price of each share will be (value of the company)/(Number of shares) = Rs. 100 million / 1 million = Rs. 100. Remember, this is the initial price or the IPO price!
Now did you a hint? Share prices don’t tell the worth of a company! I need to explain? Ok. Let’s take one example:
Garg-Sen Inc. has launched 1 million shares of Share price =Rs. 100 each.
Arindam-Mitanshu Co. has launched 3 million shares of Share price = Rs. 50 each.
Which company is bigger? No, it’s not decided on share price but, on Market cap.
Market cap of Garg-Sen Inc. = 1 million shares * Rs. 100/ share = Rs. 100 million
Market cap of Arindam-Mitanshu Co. = 3 million shares * Rs. 50 / share = Rs. 150 million.
So, surprisingly Arindam-Mitanshu Co. is a bigger company!
What lesson you learn? Never go for stock prices to decide which company you want to invest! Go for Market cap.