New investors often make the mistake of using a stock's per-share price as an indicator of quality. A stock with a per-share price of $100 must be a higher-quality stock than a company whose stock price is just $15, right?

Maybe not.

A stock's price says less about the underlying quality of the stock and perhaps more about the firm's willingness to split its shares.

The way to see how Wall Street truly values a company is not by looking at the stock's per-share price, but by looking at the company's market capitalization.

Market capitalization is simply the stock's per-share price times the number of outstanding shares. For example, a company with 10 million shares outstanding and a stock price of $50 has a market capitalization of $500 million.

Market capitalization is a useful tool for comparing apples to apples. In other words, to evaluate just how richly Wall Street values two companies, the relative metric is not the companies' respective stock prices, but their respective market capitalizations.

Let's say you have two companies. The first company has a stock price of $20 and about 100 million shares outstanding. The second company has a stock price of $60 and about five million shares outstanding.

Which company has a greater valuation on Wall Street?

If you said company #1, you're right. The market capitalization of company #1 is $2 billion ($20 times 100 million shares). Company #2 has a market capitalization of $300 million. Thus, even though company #2's stock price is $60 per share, Wall Street says company #1 is nearly seven times more valuable.

One way to think of a company's market capitalization is the price tag Wall Street puts on the entire company. If you think in those terms, market capitalization becomes a useful tool for evaluating stocks.

For example, many Wall Street analysts believe Internet stocks are overvalued primarily because many carry sky-high market capitalizations despite little sales and no profits. Indeed, it is not unusual for some Internet companies to have market capitalizations of $1 billion or more even though the firms have sales of less than $10 million.

When you think in terms of a company's market capitalization, it makes you view companies a bit differently. Indeed, if you had Bill Gates-type money and could afford to buy a company lock, stock, and barrel, would you be willing to pay, say, $1 billion (the company's market capitalization) for a company with millions in losses and sales of less than $10 million? Perhaps you would if you felt the growth prospects were huge. More likely, however, you would take a pass.

Thus, the next time you are looking at two companies, don't worry so much about their stock prices. Instead, look at their market capitalizations. If you do, I guarantee you'll make better investment decisions.