A quoted share price is the price of the most recent transaction, or the current best bid and offer. It is not a valuation and it is not what anybody could sell a large holding for.
This explains how the mechanics work. It is not advice about any investment and anybody making decisions should be speaking to a regulated adviser.
What the number is
Two prices exist at any moment. A bid, which is the highest price somebody is currently willing to pay, and an offer, which is the lowest price somebody is willing to sell at.
The gap between them is the spread, and it is a real cost to anybody transacting.
The quoted price is generally the last traded price, which sits somewhere between and may be some time old for a thinly traded security.
Which means the price you see and the price you would achieve are different things, and the difference widens as liquidity falls.
Price and value
The distinction that causes most confusion.
Share price alone says nothing about whether a company is large or small, since it depends entirely on how many shares exist.
Market capitalisation — price multiplied by shares outstanding — is the measure of size, and two companies with the same share price can differ enormously in scale.
Which is why comparing share prices between companies is meaningless, and why a share priced in single units is not cheap and one priced in hundreds is not expensive.
Splits and consolidations
Which demonstrate the point.
A share split divides each share into several, reducing the price proportionally and changing nothing about the company or about what a holder owns.
A consolidation does the reverse.
Both are cosmetic in economic terms, and both produce price changes that mean nothing, which is why historical price charts adjust for them.
The multiples
How price is related to fundamentals.
Ratios comparing price to earnings, to book value, to sales and to cash flow are the standard tools for putting a price in context.
Each has known limitations. Earnings can be affected by accounting choices and by one-off items. Book value means different things in different industries. And all of them are backward-looking unless forecast figures are used, which introduces the forecaster's assumptions.
Which means multiples are a starting point for comparison rather than a valuation, and comparing them between industries with different characteristics is generally uninformative.
Why prices move
The honest answer is that prices reflect the aggregate of participants' expectations, and expectations change for reasons that are frequently not observable.
News affects prices to the extent it differs from what was already expected, which is why a company reporting good results can fall if the results were less good than anticipated.
Which is the source of a great deal of confusion, and it follows directly from prices reflecting expectations rather than facts.
What the price does not tell you
Worth listing.
Whether a company is profitable, which is in the accounts.
Whether it is likely to remain solvent.
Whether the price is reasonable relative to prospects, which is the entire difficulty of investing and which no single number answers.
And what will happen next, which is the thing everybody wants and which the price already incorporates everybody's best collective guess about.
The practical implications
For anybody looking at prices.
Compare market capitalisation rather than share price.
Account for the spread when transacting, particularly in less liquid securities where it can be substantial.
Treat multiples as context rather than as verdicts.
And recognise that a price reflects information already known, which is why acting on widely reported news is generally acting after the price has moved.
Order types and why they matter
The practical consequence of the bid-offer structure.
A market order executes at whatever price is available, which is fast and can fill at a price you did not expect in a thin or fast-moving market.
A limit order specifies a maximum to pay or minimum to accept, which controls the price and may not execute at all.
Which means the choice is between certainty of execution and certainty of price, and for less liquid securities the difference can be substantial.
Trading outside main hours
Some venues allow trading outside normal hours, generally with much lower liquidity and wider spreads.
Prices in those sessions can move substantially on small volumes and are a poor guide to where the security will open, which is worth knowing before reacting to them.
Currency exposure
An element that is invisible in a quoted price and affects returns directly.
Holding a security denominated in another currency means the return combines the security's performance and the currency movement.
Which can add to or subtract from the return substantially, and over short periods currency can dominate.
Hedged versions of funds exist, removing most of the currency effect at a cost, and unhedged versions retain it.
Neither is straightforwardly better, and the choice depends on where future spending will occur, which is the exposure being managed.