How to Determine Market Value of Stock Shares
When you consider selling your shares of stock in a company, you probably want to know the market value of each of your shares. There’s a world of difference between owning shares of a public corporation and owning shares of a private corporation.
Public means an active market exists for the stock shares of the business; the shares are liquid. You can convert your shares into cash in a flash by calling your stockbroker or going online to sell them. You can check a daily financial newspaper — such as The Wall Street Journal — for the current market prices of many large publicly owned corporations.
Or you can go to one of many websites that provide current market prices. But stock shares in privately owned businesses aren’t publicly traded, so you need to take a different approach to determine the value of your shares.
Stockholders of a private business rarely worry about putting a precise market value on their shares — until they’re serious about selling their shares or something else happens that demands putting a value on the shares.
When you die, the executor of your estate has to put a value on the shares you own for estate tax purposes. If you divorce your spouse, a value is needed for the stock shares you own, as part of the divorce settlement.
When the business itself is put up for sale, a value is put on the business; dividing this value by the number of stock shares issued by the business gives the value per share.
Other than during events like these, which require that a value be put on the stock shares, the shareowners of a private business get along quite well without knowing a definite value of their shares. This doesn’t mean they have no idea regarding the value of their business and what their shares are worth.
They read the financial statements of their business, so they know its profit performance and financial condition. In the backs of their minds they should have a reasonably good estimate regarding how much a willing buyer may pay for the business and the price they would sell their shares for. So even though they don’t know the exact market value of their stock shares, they’re not completely in the dark about that value.
Generally speaking, the value of ownership shares in a private business depends on the recent profit performance and the current financial condition of the business, as reported in its latest financial statements. The financial statements may have to be trued up, as they say, to bring some of the historical cost values in the balance sheet up to current replacement values.
Business valuation is highly dependent on the specific circumstances of each business. The present owners may be very eager to sell, and they may be willing to accept a low price instead of taking the time to drive a better bargain. The potential buyers of the business may see opportunities that the present owners don’t see or aren’t willing to pursue.
Even Warren Buffett, who has a well-deserved reputation for knowing how to value a business, admits that he’s made some real blunders along the way.