Was flipping through Security Owner’s Stock Guide just now. (Since when I started a sentence so improperly!?) Suddenly this notion of price and value just dashed itself across my mind, and after some walk in Orchard, it would be guilty for me not to write it out 
What is market capitalization? The most common definition is “share price times number of shares” with allowance for dilution. Let’s do some dissection.
What is “share price”? Most commonly, it refers to either the day’s closing price of a share, or average price for the day. Stocks are traded, with such and such prices; when a deal is done, the price is reflected in the record. From there spawns a common notion that “the company is worth a certain price as determined by the market”.
But how true is that? Of course, it is true that how many dollars and unit shares had changed hands, under such and such terms. But can it be construed as representing the value of the firm? Can you buy the entire company at that price? Can the entire business interest changes hands at that price? I doubt so. Nevertheless, many people still view it this (or these) way.
If you want, the entire picture is very simple if supply and demand is introduced into the picture. But there is another common misconception here as well. Many people believe that supply and demand is continuous; in fact, in the case of stock market, it is not. I can play around by buying a stock at, say, $50 and sell it at $1 one second later; if the deal materializes, the change would be -98 percent and would be duly reflected in the record. This is obviously absurd I guess?
If you think about the aggregate measure, I have nothing to say about it. My business is not in determining aggregate supply and demand, and perhaps not even individual supply and demand – depends on how you interpret it. But I won’t tell you what it is at this moment
What is value? Value, like all terms, is more or less misused. Well, misused is quite a strong word; let’s say, the sense of value is broadly represented. Sometimes price is equated with value; sometimes it’s intrinsic value; sometimes it’s liquidating value; so on. I’m not saying any of these are wrong; these are right on their own right, but not on others rights It is important to see clearly what sense is value referred to when it is used in a certain context.
To me, value seems to be in the eye of the beholder – there is not a figure that can precisely describe everyone’s value. Moreover, there are some ‘basic’ items which value is assigned arbitrarily. Although it is not meaningful to decide at what figure the whole things start, we can derive some comfort that prices are relative – which gives hint to how people value things relative to others.
As the subject moves away from such a base, however, relativity assumes greater importance. At a certain level (well, the boundary is not really that discrete) and above, such values tend to center around certain figures, driven by logical relations.
There are two figures which one is called price and another value. Price is what people say – whatever they are willing and able to pay. Values arise out of relations – that’s why the higher the level [up to the point where one just have enough ability to digest the information he is receiving ], the more certain one can say about something’s value.
Such certainty arises out of stability as a result of a diversified variables [e.g. a complex machine is made of a great amount of diversified components - however the prices of individual components change, the price of the machine is not going to be as volatile], Relation of values, fortunately, is logically connected. Therefore, arbitrary though prices of certain things are, values can still be ascertained with reasonable confidence.
However, reasonable confidence does not mean reasonable precision. It is hard (to me, it’s impossible) to determine value with precision. What’s the point of assigning figure to value, then? The key is ’so obvious that it goes without saying’. If the discrepancy between price and value of something is very large, it is so obvious that it goes without saying that something is under- or overvalued, and can be taken advantage of. This is the principal concept of ‘margin of safety’.
Let’s continue some other time…
