UK share prices are quoted in pence – that means a company with a share price of 498 has shares that cost £4.98 each. The share price of the company is multiplied by the number of shares in issue to give its market capitalisation (or total worth). Therefore, a company whose share price is £4.98 and has 1,000,000 shares in issues would be worth £4.98m (market capitalisation). For this reason, it is important to realise that you can not understand whether a share is ‘cheap’ or ‘expensive’ based solely on it price.
Techniques to understand the current attractiveness of a share price include popular formulas such as the price-to-earnings ratio (P/E ratio) – which show how the ratio of a company’s earning to its per-share earnings. Although these techniques are not fully conclusive as there are many driving factors behind a share and its future prospects.
Share prices quoted through a broker will also present a bid and offer price. The bid offer spread is the difference between the bid (selling price) and offer price (buy price of shares) – the spread is often tighter for shares that are traded frequently. The bid offer spread allows ‘market makers’ to generate revenue from the trade.