Lesson 4: What is a Share?

Lesson 4 demonstrates that a share of a business is one unit of the overall business. For example, if an ice cream stand business was worth $100,000 dollars and the owner divided the company into 10,000 shares, each share would be worth $10. In this scenario, the 10,000 shares that the company would be divided into would be called the shares outstanding.

Just like a business, that becomes more or less valuable, 1 share of a business will do the same. Although we have only learned basic valuation techniques during the three previous lessons, we know that the earnings per share (EPS) -or just earnings- is one of the most important term to understand. The earnings per share (EPS) essentially tells us the profit that 1 share has made in a 1 year period.

Also, it is learned that the book value (or equity per share) is a very important term because it provides the value of 1 share if the business stopped operations. A comparison of the book value and trading price (or market price) determines our margin of safety on each investment

During the video, it is important to look at 1 share as if it were a mini-business, because it ís easy to proportionally look at the value of the entire business that way. It is also learned that owning 1 share is no different than owning the entire business.



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Source: Preston Pysh