Section 1.1: The Role of Share Price

As previously mentioned, share price should not be the primary consideration when evaluating an investment in a company. Although it can influence decisions to some extent, the true focus should be on the company's valuation. Essentially, the share price serves as a mere numerical figure created to facilitate tracking investments and manage logistical aspects. Notably, some fundraising mechanisms, like SAFEs and convertible notes, do not even have a defined share price—only a valuation cap exists. This emphasizes that valuation is what truly matters; share price can vary widely without affecting the core value of the company.

Subsection 1.1.1: Understanding Stock Splits

This leads to a common question: why do companies conduct stock splits if share price holds little significance? Typically, share price is inconsequential. However, it can become relevant if the price of a single share is prohibitively high, preventing potential investors from purchasing it. Companies often execute stock splits to lower the share price, making it more accessible to a broader audience. For instance, Tesla's notable stock split reduced the price of one share from nearly $700 to $5, allowing more investors to participate. Nonetheless, it's crucial to remember that the company's valuation remains unchanged despite fluctuations in share price.

To illustrate, consider Berkshire Hathaway, which has a staggering share price of $486,109 and a valuation of $700 billion. In contrast, Apple’s share price is $167, yet its valuation approaches $3 trillion. This demonstrates that despite a lower share price, Apple’s stock represents a significantly higher value than Berkshire Hathaway’s. Berkshire Hathaway may opt for a stock split to attract more investors who can't afford such a high price per share, potentially driving the stock price up.

Section 1.2: Grasping Valuation

Valuation refers to the actual worth of a company, typically calculated by multiplying shares outstanding by share price. Understanding valuation is critical because it can drastically influence your potential returns. However, determining valuation is often subjective and can be described as "more of an art than a science." Various methods exist for assessing a company's value, such as revenue analysis, but what if a company generates no revenue? In such cases, other factors like market traction and comparable deals may come into play.

Evaluating a company’s valuation can be challenging, especially in a market where many companies may be overvalued. For simplicity, think of valuation like assessing the worth of your car. You’d check resources like Kelley Blue Book and online marketplaces to gauge its market value. This process can help you decide a reasonable selling price. If you were to encounter a vehicle priced at $1 million while similar models are listed at $10,000 to $15,000, you'd likely reconsider making such a purchase. This underscores the significance of valuation—it directly impacts what you're willing to pay for a company or an asset.