General Discussion IG6, page-96

Hopefully the mods won't care if I elaborate a bit, but I see the SP/market cap confusion surprisingly often and I find the whole phenomenon quite interesting in its own right.

Bruham, here's good exercise to try when thinking about potential growth:

Say you're looking for a way to 10x your money and you find an interesting stock, the share price is 1c.
You might be thinking "Can the share price go from 1c to 10c? Good question to ponder, but first we need to understand the market cap to know if this growth is realistic. For argument sake let's say the market cap is $15m.

Now rather than looking at the price, look at the market cap instead and ask yourself the same question, rephrased. "Can the market cap grow from $15m to $150m?". That immediately gives you a better sense for the magnitude of growth required to achieve 10x growth. It's not just adding 9c to the share price, it's increasing the value of a $15m company by an additional $135m.

You can apply this to any stock with any shareprice and it works the same way. If you want to work out the future potential share price, start with the current marketcap, work out what you think is realistic in the future, and work backwards to get the share price. By doing this you can spot the "cheap" shares that are actually overvalued, and the "expensive" shares that might be undervalued.

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As an aside, it might help to learn there is a common fallacy when shareprices are very low. People may look at a stock and think "it's only 4 cents so 50c is possible, because I know a similar stock worth $1". But what they may not realise is this 4c stock has a market cap of $200 Billion, and any buyers will be lucky if their 4c turns into 6c. Just a hypothetical just to make my point, but I see people doing this constantly. It's a psychological trap, and a interestingly it's a huge driving force behind crypto valuations where people ONLY care about the share price and not the market cap (the complete opposite of stocks).

Would not surprise me if certain companies take advantage of this to make their share price seem cheaper, or at the very least, more attainable for more people (e.g. Tesla & Amazon in recent memory). I bought Amazon and Google years ago and I was able to afford exactly ONE share of each company, and it felt wrong. I was able to rationalize it to myself but it still felt wrong somehow, when I could go and buy 5000 shares in a penny stock instead. Rambling now so I'll end the comment. Hopefully this is helpful Bruham & for any other passer-by.