Value Change

Value Change Definition

Value change (VC) refers to the alterations in the price of a security so that it corresponds to the outstanding shares of a company presently in possession of the investors. The value change is done periodically so that investors can equally weigh similar securities for their easy comparison and evaluation.

The value change happens due to market forces that are dependent on the supply-demand of the security. For example, the number of securities sold or bought by the investors changes daily, affecting the supply and demand. Also, whenever a company makes an additional issue, it impacts value change. Therefore, the change in the value of a security helps determine the company's value.

• Value change means the price alterations made to a security to balance it to the number of outstanding shares of a company in the hands of its investors.
• It is done periodically to match the market changes.
• The demand and supply of the security and other market changes impact value change.
• It helps to equally weighs stocks belonging to the same category and hence, compare and evaluate them.
• It also helps investors value securities based on the company’s fundamentals. However, it may increase the price volatility of stocks.

Value Change Explained

Value change is the reconciliation of a company’s security price to the number of outstanding shares held by its investors. Adjusting the security price helps to weigh the securities under the same category equally. Investors use it to deduce a lot of information for contrasting investments and assessing their value.

The market price of a security is based on its demand and supply in the stock market. The continuous change of hands of securities alters the number of shares with investors constantly. Value change calculation considers this change in the number of securities with the investors.

Therefore, any value change is dependent on the net shares with the investors during a particular time frame. So, the it must be updated regularly to reflect the change in the outstanding shares with the investors.

Note that the calculation is based on outstanding stocks of a company, excluding reinvested stocks. Therefore, price adjustments occur when the company issues more shares or buys back stocks from the market.

Since the VC is dependent on market changes, so every price change has to be commensurate with the changes in the market. The logic behind the VC is that a particular category of securities must have similar weighing shares in its ambit. This helps investors to evaluate and contrast numerous financial instruments taking into account the number of shares held by investors. 

Examples

Here are some examples to understand the concept of value change more clearly.

Example #1

Let us assume that a company DEF Inc. has a total of 250,000 outstanding shares in the stock market. Moreover, the company's management board collectively decides to issue another 250,000 shares for the investors to buy. Therefore, the net outstanding shares issued by DEF Inc. doubled to 500,000 shares in the share market. This may not be good for the value of the company's shares. Hence, the company opts for equalizing the value of all the shares in the market.

Hence, the board of management resolved to undertake VC of all shares to harmonize the weightage of all the outstanding shares. For adjusting, the board may think about the number of securities with the investors for making necessary changes in the security pricing. In view of the conditions described above, the prices of each security are weighed equally concerning the same category or group of stocks.

Example #2

Let us assume that a company DEF Corp. plans to issue 50,000 shares in the market. The company already has 100,000 outstanding shares in the market. Therefore, the new 50,000 shares issued will be for the investors of the secondary market.

Thus, the new security issue may bring about a change in the company's market value. Hence, the company's security will undergo value change to balance the change in the company's market value. In addition, the VC was affected by the increasing number of securities of the company from 100,000 to 150,000

Impact of Value Change on Stock Price

The most important impact of VC is the destabilizing effect that it has upon the security prices of a company. This makes the security prices volatile in the long run. However, companies undertake VC to ensure that the security price reflects its intrinsic value.

Investors consider VC as it helps them decide whether to hold or sell the security in the long run. In fact, VC helps fund managers balance investors' portfolios by selling low-valued stocks and buying high-valued ones. As a result, investors or financial analysts are able to value stocks accurately based on the company's fundamentals.

VC applies not only to the prices of outstanding securities but also impacts the prices of other types of securities as well. Therefore, one can say that value change has the effect of neutralizing the differences in prices of securities in every portfolio of investors. This helps investors to trade actively.

Frequently Asked Questions (FAQs)

Recommended Articles

This has been a guide to Value Change & its Definition. Here we discuss the concept of value change, and its impact on stock price along with examples. You can learn more from the following articles –

• Price Change
• Price Stickiness
• Quoted Price