The Most Ridiculous Question a Novice Investor Can Ask

Out of the many questions a new investor can ask, this question is by far a ridiculous one:

How much is the stock?

This question wouldn't be so ridiculous if it wasn't followed by statements to the effect of:

• Oh! That's too expensive!
• If the price drops a bit I'll buy it
• I can only buy a few shares at that price so I'll probably avoid it and buy something I can get more of
• That's a good. I can buy a lot of shares at that price. 

These and similar statements, when combined with the first statement above, evince a fundamental misunderstanding of what it means to buy a share or a stock. A person who can ask such a question with a straight face and who proceeds to enter the equities market despite his or her lack of knowledge is asking for trouble - they'll likely end up losing over time until they get a better grasp of finance and the financial markets. 

The reason the person who asks the above question is deluded is because they don't seem to understand that in purchasing a stock, you are purchasing a piece of a company - in purchasing a stock, you literally become the owner (along with many other owners) of a real business. The price of the stock, therefore, should be somewhat related to the business - specifically, it should be related to the cash flows the business produces. 

A seasoned and knowledge investor may ask the same question -- he or she might ask how much a stock costs of course -- but the seasoned investor will only do so at the end of a thought process and analysis that will allow him or her to put the price in its appropriate context. The seasoned investor won't just look at the price and arbitrarily decide whether it's cheap or expensive based on how much the stock costs relative to other goods in the market - he or she will think about how much the stock costs relative to the profits of the firm (and/or the momentum of the price if he or she is a technical investor). 

The seasoned investor won't care if he or she can only purchase a single share of the stock at it's current price because he or she will understand that the price of the stock is determined by how the firm is divided - if you divide up the firm into more shares each stock (which will now represent a smaller piece of the firm) will be worth less. The seasoned investor instead focuses on the profits (or cash flows) that each stock represents - in a simple sense he or she is focused on how profitable the entire firm is. 

A seasoned investor thinks of buying a single share of a stock as equivalent to buying the entire firm - they are one and the same with the only difference being the percentage of the firm that is owned. 

Knowing the above, what sort of questions might a seasoned investor ask? He or she might ask something to the effect of:

• How much free cash flow (FCF) does each share represent?
• What percentage of the firm am I going to get by buying one share? Does that represent a good deal - getting this percentage of this price?
• If I could, would I buy the entire firm?

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