3SOF

... and its importance.

The market cap is the total value of a company defined by the market.

Also, Market Cap = Stock Price * Number of Shares Outstanding

So, the total value of a company may change either because the stock price changes, or because the number of shares outstanding changes.

We all have historic charts of stock prices, but almost nobody pays attention to the evolution of the number of shares outstanding, which is of equal importance to the change in market cap.

In fact, the following situations may indeed happen:

1) A stock may go down from $20 to $1, and yet its market cap rise. Investors lose 95% of their investment in the stock, but the company is worth more, because the number of outstanding shares was raised more than 20 fold.
2) A fundamental analyst may get to the conclusion that a company has great future prospects. He's right, and revenues and earnings grow a lot. Yet, the price doesn't go up, because the company keeps selling more and more shares to finance growth. The analyst was right and yet he did not make money, he may even lose it.
3) If a company is buying back shares, fundamentals can deteriorate and yet the stock goes up, because the number of shares outstanding is being diminished, so the market cap goes down if the price stays the same. Price may go up to compensate for the drop in the number of shares outstanding.
4) It's of no use to find a company with great growth prospects if the number of shares outstanding has been growing and is expected to continue to grow.
5) The only good reason for the number of shares outstanding to rise is a stock split because the stock price is too high. But, when there is a stock split, existing investors get more shares, where as when there is a private placement or sales in the open market existing investors see the value of their shares diluted.
6) A company with not so attractive fundamentals and a rising number of shares outstanding will probably see its share price go to zero over the long term (as happens with most OTCBB stocks), unless things change dramatically.
7) We should look for companies with stable or even declining number of shares outstanding.
We should avoid stocks with a rising number of shares outstanding, unless the reason is a stock split.

I think these 8 points illustrate quite well why the number of shares outstanding is so important to our long term investments. Yet, there's little information about it in historic terms. At least I didn't find any on a Google search.

From now on I will always look for the historic evolution of the number of shares outstanding as I do with the stock price before I consider any investment.

I wish you a happy Christmas 

Hi David, thanks for the info. Its good to see it written down to clarify it in your mind. It definately is a grey area and one which can be very deceiving. Dave, do you know if there is any chart analysis for stocks that correlates or compares the two figures.

Thanks again

uc.

PS. What happened to spell check?

This is worth EiGHT applauds

I would suggest that some arbitrary rating on your analysis will help all. e.g on scale of 1 to 5 with 1 being the best history and 5 being the worst.

I guess we should have taken this into account when we bought in to BRVO. They have a large number of outstanding shares and we should have seen it. I think thats where we made our mistake because even though BRVO is a good story over all: its gonna take too much work to get that stock price up with all those outstanding shares.