Understanding Price Per Share (PPS): A Guide for Investors

When you purchase stock in a publicly traded company, you’re buying shares at a specific price. This fundamental concept in investing is known as price per share, or PPS—essentially the cost associated with acquiring one unit of ownership in that company.

Why PPS Matters for Investment Decisions

The significance of price per share lies in its direct impact on investment strategy. Investors typically base their buying and selling decisions on this metric. When considering a purchase, strategic investors monitor PPS to identify favorable entry points—acquiring shares when the price per share dips to relative lows maximizes profit potential. Conversely, when holding a position, investors aim to sell when the price per share exceeds their original purchase cost, thereby realizing gains.

How Stock Prices Fluctuate

The price per share is not static; it responds dynamically to both company performance and broader market conditions. Consider a company that begins a trading week with a price per share of $20. Should the company announce disappointing earnings results, the price per share might decline to $15 within the same week. This volatility reflects market sentiment and corporate fundamentals in real time.

Setting Initial PPS During IPO

The initial public offering represents a critical moment for establishing price per share. During this process, financial analysts evaluate comparable companies and growth projections to determine the company’s total valuation, decide the number of shares to issue, and calculate an appropriate price per share for each share of common stock.

The relationship between valuation and share count directly determines the starting price per share. If a company’s estimated value is $20 million and 20 million shares are released to the public, each share will have an initial price per share of $1. However, if the same $20 million company issues only 10 million shares, the initial price per share rises to $2. This demonstrates how share issuance strategy influences the resulting price per share at launch.

Using PPS to Evaluate Investment Quality

Beyond the surface metric, price per share serves as the foundation for calculating deeper valuation indicators. The P/E ratio (price-to-earnings ratio) exemplifies this relationship, measuring the connection between a company’s price per share and its earnings per share. This ratio helps investors distinguish between overvalued and undervalued opportunities.

When a stock appears overvalued and you acquire shares at an inflated price per share, you face potential losses if the market corrects downward. Conversely, identifying undervalued stocks with a price per share below intrinsic value creates opportunity—profits emerge when the price per share eventually rises to align with the company’s true worth.