- Market capitalisation and market value are terms often used interchangeably by investors, but they have a thin line separating them.
- Market capitalisation is calculated by multiplying the number of outstanding shares with the price of each individual share.
- Market value is a broader, all-encompassing term that reflects the performance of a stock- based on various external factors other than just equity.
Two terminologies that newbie investors often mistake for each other are market capitalisation and market value. However, as one spends time investing, the difference between the two terminologies quickly becomes apparent.
Typically, investors give a high level of importance to market capitalisation while selecting stocks. Essentially, market capitalisation, or market cap as it is called, refers to the total value of the outstanding shares of a company. It is calculated by multiplying the total number of outstanding shares with current value of a share.
On the contrary, market value is a broad term encompassing several market indices such as price-to-earnings ratio, return on equity, etc. Market value is amore volatile concept as it can be influenced by a range of factors.
Before charting out their differences, let us first glance through both these metrics individually.
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One of the most efficient methods to gauge a company’s standing in the financial market, market capitalisation is an equity-based metric. Essentially, market capitalisation reflects the value of the total outstanding shares of a company. Thus, to measure a company market cap, it must be a publicly owned firm.
To find out the value of the “floating” or outstanding shares of a company, two methods can be used, namely, the float method or free float method. In the free-float method, the shares held by executives, government or any shares belonging to a party that are not traded in the market are not a part of the calculation.
Market capitalisation vs Market value: Where does the difference lie?
The resulting figure derived from the calculation is used to categorise stocks into small-cap, mid-cap, and large-cap companies. Generally, companies holding a market cap under US$1 billion are considered small-cap, those holding a market cap between US$1 billion to US$10 billion are called mid-cap companies and finally companies with a market cap of US$10 billion or above are considered large-cap companies.
Simply put, market cap is often taken as a symbolic figure representing the size of a company as well as of its underlying operations. Thus, investors often hold the notion of large-cap companies being a safe haven, simply because there are less chances of a large-scale enterprise to abruptly incur losses.
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Market value of any asset is the price that the asset would be valued at in the market. Any security or asset that can be traded in the market has a market value equal to the price received in exchange for it. Indices used to calculate the market value of a company depict more than just information on equity.
Some of the commonly used metrics that depict the market value of a stock include price-to-earnings ratio, price-to-sales ratio, etc. All these indicators use information about the equity as well as other additional factors that impact the stock.
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Where does the difference lie?
It is possible that at times market value is equated with market capitalisation to generalise the terminology. To get better perspective, market cap can be classified as one of the components of market value. Thus, market value of equity can be better expressed in a single term” market capitalisation.
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Additionally, market value is more susceptible to changes in the market depending on the factors it may include. However, market capitalisation has one universal formula that applies to all stocks.
Interestingly, market value is highly reflective of the sector that the company is based in. Thus, any sectoral changes would be highly reflected through the market value, but not as realistically through market capitalisation. In other words, market capitalisation depicts the performance of the stock itself without highlighting much about external factors, unlike market value which is more intensely affected by overall changes to the market.
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Though both market capitalisation and market value are useful terms used to gauge the health of a stock, they reflect different aspects. Thus, investors should carefully understand the difference between these metrics before choosing the appropriate stocks for their portfolio.