when you look at the stock market it's
difficult to understand why each stock
is priced in such a way I mean look we
all have heard the news that Apple is
the first trillion dollar company its
world's biggest and most successful
company maybe the stock price should be
higher as well right
not really the reality is quite
different Apple stock price right now is
two hundred fifty eight dollars well a
company that's hundreds of times smaller
like NVR Incorporated had a stock price
of three thousand dollars does that mean
that NVR Incorporated is bigger than
Apple the short answer is no however
it's a little bit more complicated than
it might seem
in fact the entire stock price seems
quite complicated at first look but
there is a logical explanation behind
most of the things to make a sense out
of the stock market we have to
understand what is the stock in the
first place let's say for the last six
months you have been thinking of
starting a business
the only problem you have is you don't
know what business to start one day on
your way to college an idea strikes your
mind you pull out your phone and write
it down you rush to your house and start
planning everything looks perfect you
know how to turn your idea into a
multi-billion dollar company Congrats
but it's too early to celebrate because
you don't have the capital to start you
gather your family members and you
explain to them the idea hoping that
they will invest in the company everyone
thinks you're crazy except your uncle
who decides to bet on you $10,000 in
exchange for 20% of the company it might
not seem much but it's actually a lot
because your uncle just valued your idea
that's not proven yet at $50,000 so
you're just a company and issue a
hundred thousand shares and your uncle
gets twenty thousand of them you start
building your website and designing your
product in a few months you run out of
cash and you need to raise more money
and like last time where you simply had
an idea now you have a concept to
present so instead of going to ankle
again now
can do something different like talking
to some of the big guys such as angel
investors angel investors are usually
the rich dudes who are looking for
innovative ideas or young entrepreneurs
to invest in something like sharks in
the shark tank
it's not easy to convince these guys to
throw money into your business because
statistically nine out of ten businesses
fail and you have to prove to them while
you are an exception after talking to
multiple angel investors luckily you
could get one of them on board but first
you have to agree on the valuation there
is pre-money valuation and post-money
valuation it's not as difficult as it
might sound pre-money valuation is how
you value the company before receiving
the investment and post-money valuation
is pre-money valuation plus the
investment the higher the pre-money
valuation the less portion of the
company the investor is going to take
you enter into a negotiation and you
convince the investor to throw 1 million
dollars into your business with two
million dollars post-money valuation so
the investor is going to take 50% of the
company and users will get diluted
together with your ankles one that
doesn't mean you're going to have fewer
shares the company will simply issue
another hundred thousand shares for the
investor so now there are a total of
200,000 shares instead of a hundred
thousand shares and your stake is 40%
with a million dollars you rent an
office hire some designers engineers and
specialists to complete your product
finally everything is ready you're about
to launch your product app service
whatever but guess what you're out of
cash and you still need a marketing
budget and sales people so you decide to
raise some more money you go for a
series B this time you meet some VCS or
venture capitalists they're not your
typical angel investors these are dudes
with MBAs and work and venture
capitalist firms who take other people's
money and invest in companies such as
yours anyways after multiple negotiation
they decide to bet on you since you
already have a team
and a product to launch your company
hopefully now worth more let's say the
VC offers you a 10 million dollar
investment with a twenty million dollars
post-money valuation you'll find that
offer fair and you accept it the company
issues another two hundred thousand
shares and everyone stag gets diluted
again since the VC just purchased 50% of
the company in case you're wondering no
one has lost money so far in fact
everyone just got wealthier the angel
investor for example had 50% of two
million dollars when he invested in the
company now he has 25% of a company that
worth 20 million dollars in fact your
stag worth now four million dollars
anyways you can go for a Series C D and
so on few years has passed Congrats you
have made it your idea turns out to be a
success your business is finally making
money remember everyone who has invested
in your company has been waiting for you
to grow big enough so that they can cash
out especially your uncle who's ten
thousand dollar investment now worth
millions
you have two options you either get sold
to one of the Giants of the industry
like Instagram did or you go public like
Facebook and that's known as IPO initial
public offering is just another way to
raise funds and issue shares but this
time anyone can buy your shares they're
open to the public
your uncle and that angel investor can
sell their shares and make a fortune
in fact people can buy and sell your
shares among themselves in the stock
market so before going public the stock
price is determined by what you and the
investor would agree on but after going
public the number of factors that would
influence the price slightly change the
laws of demand and supply would
determine the price Facebook went public
in May 2012 at $38 per share valuing the
company at a hundred four billion
dollars but the public did not agree
with Facebook so the demand for Facebook
shares wasn't as high as the supply
therefore on the day of IPO the stock
price dropped to $18
for sure but Facebook still managed to
sell enough shares to raise 16 billion
dollars making it one of the largest
IPOs in the country the price of the
stock price doesn't accurately presents
the value of the company because the
number of factors that can influence the
demand and supply of a certain stock are
just too many let's just say
hypothetically some kind of a disease
would spread around the world
that would push the media to talk and
exaggerate about how the disease could
crush the economy that would scare off
immature investors and would push them
to sell their stocks before the market
would go down as the media said so the
supply of a certain stock let's say
Facebook would be much higher than the
demand for it in the market which would
push the price to plummet and that could
scare off the rest of the investors and
push them to sell their shares as well
before it drops even further even though
this particular disease in anyway isn't
affecting Facebook it still forced the
stock price to drop significantly here
is another example the company might
realize its earnings for the last
quarter and they might not meet the
expectations slightly that could get
some negative press a negative price
could easily push some investors
especially immature ones to sell their
shares and that would increase the
supply of the shares and would drive the
price down and even scare off more
professional investors it's a
never-ending cycle that's why a panic
over the crisis can destroy the economy
the company might not be making a profit
for years or decades but because it
seems like sometime in the future it is
going to make a lot of money investors
with key buying it shares hoping that
one day it's going to pay back and that
hope would keep the price rising like in
the case of Amazon and didn't make a
profit for 20 years and it made Bezos
the richest man in the world if a
company would keep doing great the stock
price could rise to an unbelievable
amount berserkers Hathaway stock price
picked at
$340,000 a share in February yes you
heard it right a single stock cost three
hundred forty thousand dollars that's
what it takes to invest in Warren
Buffett's company so some companies play
around with their stocks to increase the
demand for the stock by splitting their
stocks for example to keep them
attractive even to small investors take
an example of Apple the stock price
currently is two hundred forty-seven
dollars but did you know that in June of
2014 it was $650 that doesn't make sense
right because the company doubled its
market cap and iPhone sales skyrocketed
since then then what does that suppose
to mean let me explain
in June of 2014 Apple splitted stocks 7
for 1 and simple Awards Apple divided
each stock to 7 stocks so the stock
price dropped to 92.7 dollars so if you
had one Apple stock back then that cost
$650 now you have 7 stocks and each of
them cost 92.7 dollars nothing really
changed but the stock price seems more
affordable now which increases the
demand for them
hence the price would rise as well the
number of factors that could influence
the stock price are way more than we can
possibly cover in this video but here is
the catch the trick is to find out if
the price of the stock does really
represents the true value of the company
if it's overvalued it does not worth
investing because sooner or later the
price of the stock will drop to its real
value on the other hand and the stock
price is lower than what the company
really worth then it's a great
investment since the stock price sooner
or later will rise to its real value I
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thanks for watching and until next time
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