Why Are Some Stocks Worth More than Others?

Published: 20 Feb 2023

Why does one stock cost $250, while another only $5? What makes stock prices different? This page explains what determines stock prices and why some stocks are worth more than others.

Two things that determine stock price

The other word commonly used for stocks – shares – better describes what they are: They are small fractions (shares) of a company.

Stock price – the price of one share in a company – depends on two things:

  1. The "price" of the entire company (how valuable the stock market thinks the company is)
  2. divided by how many shares there are.

Both of these things vary across companies and, as a result, stock prices are also different.

Some companies are worth more than others

Some companies are more valuable than others.

A small family-owned store in your street may only be worth tens or perhaps hundreds of thousands of dollars. Such business is probably too small to be traded on a stock exchange.

A medium sized manufacturing company that has two factories in your state may be worth several million or tens of millions.

Finally, a global corporation like Amazon or McDonald's is worth billions.

A 5% stake in the small store in your street may be nice to have, but won't make you rich. A 5% stake in Amazon makes you a billionaire.

Number of issued shares varies

Each company's total equity (ownership) is divided into a different number of shares.

For example, if there are 10 shares in a company, that means each share represents 1/10 of the company's assets and liabilities. If you own 4 shares, you own 40% of the company.

The big companies, whose shares are traded on a stock exchange, usually have millions and sometimes billions of shares in circulation. A single share in a company like Amazon does not give you 10% ownership, but something closer to 0.0000001%, for example. To be precise, at the time of writing this, Amazon has 492.33 million shares outstanding, so one share gives you a 1 / 492,330,000 = 0.0000002% stake in Amazon.

The total number of shares can change over time. For instance, a company may issue new shares to raise money for an expansion of its business, e.g. to build a new factory or develop a new product. As a result, the total number of shares increases and the percentage that belongs to one share decreases. Hopefully, the new investment makes the company as a whole more valuable and even the now smaller portion of the company goes up in value (in other words, share price goes up).

Why stock prices vary

To put it together, different companies have different stock prices, because:

  1. Each company as a whole has different value.
  2. Each company is divided into a different number of shares.
  3. Stock price is the ratio of the two.

Stock prices not only vary across companies, but also over time. The same company's stock price can go up or down as the company's perceived value changes and, from time to time, the total number of shares may also change.

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