How to Own the World: A Plain English Guide to Thinking Globally and Investing Wisely by Andrew Craig

Author:Andrew Craig [Craig, Andrew]
Language: eng
Format: epub
Published: 2015-10-20T14:00:00+00:00

How to value a share

So how can an investor work out when a price is good or bad? “Hindsight is 20/20”, as they say, but how might we have known that 160p was a good price for Tesco and 485p a bad one at the time? As ever, the books written in a bid to answer such a question could fill an entire warehouse, but I will do my best to outline the key ideas here in plain English.

It all goes back to the point that when you buy a share you become a part-owner of the business. This means that you are entitled to a share in any profits the business makes, just like the 17th-century investors from London and Amsterdam who were entitled to the fruits of a successful expedition to the East Indies. What you need to work out is how much you should be paying for your share. Annoyingly enough, and as counter-intuitive as this sounds, the share price alone does not give you this information.

To work out how much you are paying for a share in real terms, you must think about how much profit a given company is making now (and is likely to make in the future), and compare how much you might have to pay for your share of that profit to how much you might pay for the same share of another company’s profits. This is actually much simpler than it sounds. Let us look at a quick example.

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