Determining the Market Value of Stock Shares
If you want to sell stock shares, how much can you get for them? How do you determine the market value of the stock shares? There’s a world of difference between owning shares of a public corporation and owning shares of a private corporation.
Public means there is an active market in the stock shares of the business; the shares are liquid. The shares can be converted 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 Internet sites (such as Yahoo! Finance) that provide current market prices.
Stock shares in privately owned businesses aren’t publicly traded, so how can you determine the value of your shares in such a business? Stockholders of a private business generally don’t worry about the market value of their shares — until they are serious about selling their shares, or when 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.
Stockholders of a private business 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 might 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 are not completely in the dark about that value.
Generally speaking, the value of ownership shares in a private business depends heavily 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 willing to accept a low price if they are eager to sell out. The potential buyers of the business may see opportunities that the present owners don’t see or aren’t willing to pursue.