Share price refers to the market price of a share of stock in a public (or private) company. Market share is the percentage of the market that a company controls or derives profit from in the course of business.
Publicly Traded Company
Share prices in publicly traded companies are determined by the market--essentially by an agreement between a buyer and a seller in what’s called a continuous auction market. In simplistic terms, share price is based on the total value of a company divided by the total number of shares outstanding (in the hands of investors). Because different investors put different values on a company based on their methodology and outlook, share prices constantly fluctuate.
Privately Held Company
The process of determining share price is more complicated for privately held companies, because experts must be brought in to appraise a company’s value based on multiple factors, although, again, the share price is ultimately determined by an agreement between a seller and a buyer.
The total market for any good or service can be estimated based on the total dollar amount spent by all consumers on the product or service or the total number of units sold during a specific time period. For example, the total U.S. market for automobiles can be estimated based on the historical numbers of vehicles sold annually. The number of units sold and the size of the market naturally vary from year to year based on multiple factors, such as economic conditions, new models and consumer trends, but every market is finite and has a lower and an upper boundary.
Once it knows the approximate total size of the market, a company competes to get as much of it as possible, which is its market share. For example, if every fifth vehicle sold in the U.S. is made by Ford, Ford is said to have a 20 percent share of the U.S. auto market.
Correlation Between Share Price and Market Share
When a company’s market share increases, its share price is likely to go up, because a larger market share reflects company growth and success--factors that impact the share price.
- PassTrak Series 7 General Securities Representative License Exam Manual; 2003
- “One Up on Wall Street”; Peter Lynch; 2000