Voiceover: Let's talk a little bit about what it means
to own shares or stock in a company,
so shares or stock.
I think we all have a general sense,
but what I want to do in this video
is make it a little bit more tangible
to really understand exactly what you're buying
when you buy a share of stock.
So the general sense,
and this is exactly what it really is,
is when you buy stock or you buy shares,
you're essentially becoming a partial
or a part owner of the company.
Part owner of company.
Just to contrast this with bonds
because they're often kind of used
in the same phrasing,
"Oh, I'm gonna go buy some stocks or bonds,"
or "I deal with stocks and bonds."
Bonds.
Bonds, you become part lender to the company.
Part lender to the company.
So, for example, if you buy a,
well, I'll just say a face value bond
of, let's say, it's $10.
Let's say it's $1,000,
and there's 1,000 people who do that.
Each of you all are lending $1,000 to the company
and since there's 1,000 of you,
you're lending $1 million to the company.
I'm not going to go into detail in that
because the focus of this is going to be stock,
but it's good to keep in mind
that they're very different things.
Here, you're owning the company.
Here, you're lending to the company.
So just to make this a little bit more tangible
of exactly what we're owning,
let me draw a simple balance sheet
for some company X.
So this is Company ...
Let me do a new color.
Let's say we're dealing with Company X right here,
and let's say if we looked at Company X's assets,
and when we talk about assets,
it really is the same thing that we mean
in the real world, or in our everyday life
when we talk about assets.
The things that have value.
Things that are going to give us
some type of future benefit.
A house is an asset because it gives us
the future benefit of being able to live in it
and protecting us from cold weather and rain.
Cars are assets because they give,
provide us some transportation.
Cash is an asset because it can be exchanged
for things we need in the future.
All of these ...
A loan to someone else is an asset
because in the future,
they will pay us back.
A loan to me is a liability,
which we'll talk about in a second,
but anyway, let's just in the very abstract sense,
say this is Company X's assets.
Let's say that they're worth $100 million.
$100 million,
and I'm not going to go into exactly
how this number is determined
or who's determining it,
or who's saying this is 100 million,
but let's just say this is,
we agree that this is how much their land
and their patents and their copyrights
and their cash and their buildings
and everything else they have is worth.
All of the things that will generate future value.
Now, let's say that Company X
has also borrowed some money,
and maybe they borrowed it by issuing bonds,
which I will not go into detail on.
Let's say they borrowed some money,
and so they owe some people collectively
$80 million.
This could have been a straight debt
from a bank,
or this could have been via a bond issue.
They might have issued,
maybe they issued a million bonds,
where each of those essentially represent
a debt of $80.
I won't go into that too much,
but I think you get the idea of what I mean
of part lender,
but this is debt.
$80 million of debt right here.
Let's say that's all of their liabilities.
There are other liabilities other than debt,
but for simplicity,
let's say that's their only liability
and debt tends to be the biggest.
Now, what's left for the owners?
A good way to think about that is
what would happen if this company were sold
and the debt paid off.
So, if the company were sold
and these assets really are able to be sold
for $100 million,
you get $100 million.
You'd have to pay the debt holders,
you'd have to pay off the debt first,
so you'd have 100 minus 80,
you'd have $20 million left for the owners.
I'll do that in this other green color.
So you'd have $20 million left.
$20 million left,
and this is called the equity,
or the owner's equity.
Owner's equity.
This is completely the same idea
as when people talk about having equity in a house.
If I have a $300,000 house,
and I still have $200,000 left on the mortgage,
then I have $100,000 in equity.
It's completely analogous.
You can see, very simply, that assets.
I'll write this down.
You're getting a little bit of
an introduction to accounting right here,
but assets are going to always be equal to liabilities
plus equity.
Because essentially, or you can view it this way:
If you subtract liabilities from both sides,
assets minus liabilities is equal to equity.
This might be a little bit more intuitive.
What we have leftover is always what we own
minus what we owe.
That is what the owners have.
Now, when we say that I'm part-owner of a company,
that means that I have a piece of this pie right here.
This is what I am a part-owner of, the equity.
So, for example, if we have,
if there are 2 million shares,
so Company X, let's say they have 2 million shares,
and let's say that the equity
is really worth $20 million.
How much is each share worth
if we believe all of these numbers?
Well, we have $20 million of equity,
20 million of equity divided by 2 million shares,
divided by 2 million shares,
which gets us $10 of equity per share.
If we believe all of these numbers,
and we know that Company X has 2 million shares,
then we would say that each share is worth $10,
and if we like these numbers
and if someone is willing to sell us a share
for less than that, we would buy it.
If someone was willing to pay more than that,
maybe we would sell it.
Just to make all of this a little bit more tangible,
let's look at an actual example of a company
to show you that I'm not making all of this stuff up.
I got this off of your traditional financial sources.
This is actually from the filings
of this unnamed company,
and you'll get extra bonus points
if you figure out what this company is,
and this is their actual stock-trading activity,
and I just want to draw the same diagram
that I drew up here,
the same diagram that I drew up here,
to really, on this company,
so you can kind of see that this
actually happens in the real world,
so first let's draw their assets.
Let's say this is Company X,
and let's say these are its assets right there.
Its assets.
Let's go to its balance sheet.
This is actually what they reported.
This is June 30th,
well, we want to take the more recent date.
They're just trying to compare to
what they had before.
Let's look at these,
this is some time ago,
but it doesn't matter.
We're learning.
This is, we're not trying to decide
whether we want to invest in this right now.
This is a very old financial statement,
but let's just look at what they're saying.
They have our total assets here.
30 million, I'll just do in round numbers.
$30 million right there,
so $30 million.
You might be curious about,
"Hey, what's all this current asset business?"
Those are things that are either cash
or that can be turned into cash
within the next year.
So, for example, accounts receivable.
That's money that other maybe vendors owe them,
that they're going to pay very soon.
Inventories, these are things that they have
maybe in the warehouse that they can sell
and turn into cash very quickly.
Other current assets, maybe that's stock
or some other type of investment that they could sell
and turn into cash.
So they have 18 million of current assets,
that's things that they can turn into cash very easily
and very quickly,
definitely within the next year.
Then you have some property, plant and equipment.
this is kind of that land and buildings and machinery
that I talked about,
and then who knows what these other assets are.
Maybe those are trademarks or patents,
or who knows what they are?
But all in all, they have $30 million of assets.
Now let's go to the liabilities.
They have some current liabilities,
16 million.
Current liabilities, just so you know,
those are liabilities.
These are things that they have to pay in cash
within the next year.
It could be debt, it could be payables.
They have to pay some other vendors.
Who knows what it is?
But you can kind of view it as debt on some level,
maybe debt that you have to pay in the next year.
Then the have long-term debt of 5.5 million.
If you add these two up,
you get pretty close to about 22 million,
so just for simplicity, I'll put it over here as 22 million.
So this company has 22 million in liabilities.
22 million liabilities.
These are their assets,
just to get all the labeling right.
So what's left for equity?
We'll just draw it on this simple diagram.
We have 8 million left for equity.
8 million left for equity,
and actually, they did the calculation here for us.
The exact number is 8.39 or 8.4 million in equity,
but this is a nice round number for us to show.
This is real-world stuff that we're dealing with,
and if you wanted to know, kind of,
if you believe these numbers,
if you believe that this company's assets
really are worth $30 million,
what should you pay for it?
Well, then you're going to divide by
the total number of shares,
and you'll see this in some financial statements,
and I won't go into the details
of the difference between basic and diluted,
but the numbers are very, very close,
so we don't have to worry about it too much.
But let's just say that this company has 2.7,
looks like 2.78 million shares.
So if the book value is 8.396.
I mean, I wrote 8 here,
how much should each of these shares,
how much should each of these,
and when I say book value,
I mean these are their books.
According to their books,
the equity is worth 8.4 million.
If we really believe that the equity's worth 8.4 million,
how much should each share be worth?
Well, we'll just divide 8.4 million,
we'll just have to divide 8.4 million,
8.4 million.
This is actually an 8.4.
I wrote 8 there for simpicity.
Divided by the number of shares, 2.78 million.
So that's a million, and that's a million,
and I'll get a calculator out for this one right here.
So, let's see, we're here doing 8.4 million
divided by 2.78 million shares.
So according,
if we believe these numbers, if we believe the books,
the book value of the shares is about
$3.02 per share,
so this is $3.02 per share,
book value per share.
That's what we should be willing to pay for this,
or what we think a fair price per share
of this company is
if we think these assets are really worth $30 million.
Now, what are people actually paying
for these shares?
Well, that's,
we look at this information right here,
and we see that the last trade here was for $2.58,
so people are paying a discount
to the number we just calculated,
so the only reason why people are paying
less than that,
or someone's willing to sell for less than $3,
is that someone out there,
especially the person selling,
thinks that this company really,
the assets of this company
really aren't worth $30 million.
He or she thinks of the assets of this company
are worth less than $30 million,
and maybe they think that the company's prospects
aren't as good.
They're product isn't,
the sales are going to go down.
Who knows?
Maybe the person buying it,
maybe they think it is worth $3 a share,
and that's why they're willing to pay $2.58 for it
because they think it's going to go up.
Just so that we get some of the other details
that we see here, this bid,
this bid right here.
This is what someone has explicitly said
that they're willing to pay for a share.
The ask is what someone has explicitly said
they're willing to sell a share for.
This 52-week range is the range of prices
that the shares have sold,
so in the past year,
these shares sold for as low as $1.20,
and that was actually a great deal
because they went up, even now,
where they're selling at $2.58.
the average volume right here,
this is the number of shares sold per day,
exchanged per day.
The market cap, right here,
you've probably heard that word before.
That's essentially the market's sense
of what this number really is.
We're saying that the books of this company
are saying this company is worth $8 million,
but the market cap is saying
what the equity of the company is worth
in the market's mind,
and to get that number,
they're taking the $2.58.
they're taking the $2.58 times the number of shares.
Times the 2.78 million shares.
If we do that, we're going to get,
let's see, 2.58 times 2.78 is equal to exactly,
well, it's a little different than what they had.
Maybe it's a little round-off error,
but roughly 7 million in market cap.
Like I said before, the market is not paying $3.
It's paying $2.58,
and so the market is saying that the equity,
this piece right here is closer to 7 million,
even though the books are saying
that this number right here is above 8 million.
Well, anyway, hopefully that was a little bit useful
and gives you a little bit of a sense
of what it actually means to buy shares
in a company.