Market Capitalization vs. Market Value: An Overview
Market capitalization is the number of a company's shares outstanding multiplied by the current price per single share. Market value is more complicated. It's assessed using numerous metrics and multiples including price-to-earnings, price-to-sales, and return-on-equity.
Accurately assessing the value of a company can be of utmost importance in many areas of the financial sector, including economics, accounting, and investing. Company sizes and values can be measured in numerous ways and there's often confusion concerning similar-sounding terms.
That's the case with market capitalization and market value. Each is a measure of corporate assets but the two are vastly different in their calculation and precision.
Key Takeaways
- Market capitalization and market value are both measures of corporate assets but they're vastly different in their calculation and precision.
- Market capitalization is calculated by multiplying the number of shares outstanding by the current price of a single share.
- Market value is assessed using numerous metrics and multiples including price-to-earnings, price-to-sales, and return-on-equity.
- Market capitalization refers to the market value of a company's equity, not its market value overall.
Market Capitalization
Market capitalization or "market cap" is a simple metric based on stock price. You can calculate a company's market cap by multiplying the number of its shares outstanding by the current price of a single share. A company with 50 million shares and a stock price of $100 per share would
have a market cap of $5 billion.
Market capitalization is often used to help define the value of a company when analyzing potential trade opportunities but stock prices themselves are highly subjective in many cases. The price of a stock doesn't follow any mathematical formula in its movements, although day traders are always trying to come up with money-making equations.
Different factors are weighed in the price in vastly different ways so even market capitalization can be a somewhat subjective measure of value.
Market Value
Market cap is often referred to as the value of a company or what a company is worth but a company's true market value is infinitely more complex.
Market value is determined by valuations or multiples accorded by investors to companies, such as price-to-sales, price-to-earnings, and enterprise value-to-EBITDA. These metrics take several factors into account in addition to stockholder equity.
Factors include outstanding bonds, long-term growth potential, corporate debt, taxes, and interest payments. The higher the valuations, the greater the market value.
A company's market value can fluctuate greatly over timeand is heavily affected by business cycles. Market values plunge during the bear markets that accompany recessionsand they rise during the bull markets that occur duringeconomic expansions.
Market value can be dependent on numerous other factors, such as the sector in which a company operates, its profitability,its debt load, and the overall market environment. It also reflects investor or analyst opinion.
Company X and Company Y may both be technology companies with $100 million in annual sales but X’s market value will generally be significantly higher than that of Company Y if X is a fast-growing technology firm that's investing heavily in R&D. Investors will expect greater innovation and newer and better products from Company X.
Key Differences
The terms market capitalization and market value aren't confused just because they sound similar. People often use the two interchangeably. They refer to a company's market cap as its "market value," as its "stock market value," or as its "value in the marketplace."
But they're referring to a specific type of market value when they do this. Market capitalization is essentially a synonym for the market value of equity.
A company's market cap is a single incontrovertible figure because it's the number of outstanding shares multiplied by the price of a share. Market valuations can vary depending on the exact metrics and multiples that an analyst uses.
Why Is Market Cap Important?
Market cap is a good insight into the size of a company. It can be used as a tool to compare companies as well. Market cap is the most representative guideline for analysis and a base for all other financial metrics.
Is Market Cap Always Higher Than Book Value?
Consistently profitable companies usually have market values that are greater than their book values. Investors have confidence in the company's ability to generate growth in both revenue and earnings.
Is Market Value the Same as Current Price?
No, it's not. Market value is the company's value calculated from its current stock price. It rarely reflects the actual current value of a company. Market value can instead be considered a measure of public sentiment about a company.
The Bottom Line
Market capitalization and market value are both calculations based exclusively on corporate assets. Market capitalization is the number of a company's shares outstanding multiplied by the current price of a single share. Market value is more complicated because it uses numerous metrics and multiples in its calculation: price-to-earnings, price-to-sales, and return-on-equity.
Neither of these metrics should be confused with the book value of a company, which is its net worth. The book value is calculated by subtracting non-monetary assets and liabilities or debts from a company’s total assets. A company’s book value may be lower or higher than its market value or its market capitalization.
FAQs
Market Value: An Overview. Market capitalization is the number of a company's shares outstanding multiplied by the current price per single share. Market value is more complicated. It's assessed using numerous metrics and multiples including price-to-earnings, price-to-sales, and return-on-equity.
What is the difference between market cap and market value? ›
What is market cap vs. valuation? Market cap estimates the value of a public company by multiplying its current share price by the total number of outstanding shares. The term “valuation” refers to any attempt to estimate the value of a company, which includes the market cap and other methods.
What is the difference between market capitalization and net worth of a company? ›
No market cap is not the same as net worth. Net worth is the book value (Assets - Liabilities). The market cap of a company is the value of all the company shares trading in the stock market. The market cap could be higher or lower than the book value.
Why market cap is more important than price? ›
Market cap is a useful measure of a company's overall value, as the market sees it. Because different corporations have different amounts of shares available for trading, the market cap produces an apples-to-apples comparison regardless of the actual price of a company's stock.
What is market value versus market size? ›
So, market size is an estimate of the overall market reach. Market value refers to the financial worth or estimated market capitalization of a company or industry. It's a measure of perceived value. It can give you an idea of how much a company could sell for in a given market.
How to define market value? ›
Market value is the price of an asset on the marketplace, based on the prices buyers are willing to pay and what sellers are willing to accept. For publicly traded companies, market value refers to the market capitalization: the number of outstanding shares times the share price.
How do you calculate market cap vs price? ›
Market Cap Formula
To calculate the market capitalization of a company, the company's latest closing share price is multiplied by its total number of diluted shares outstanding.
How much is a company worth based on market cap? ›
Market capitalization shows how much a company is worth as determined by the total market value of all outstanding shares. To calculate a company's market cap, multiply the number of outstanding shares by the current market value of one share.
What is the difference between market capitalization and enterprise value? ›
Key Takeaways. Market capitalization is the sum total of all the outstanding shares of a company. Enterprise value takes into account the debt that the company has taken on. Enterprise value, therefore, can identify strengths or weaknesses that market cap cannot.
What is an example of a market capitalization? ›
To calculate market cap, you take the total number of a company's shares outstanding and multiply that figure by the company's current stock price. For example, if a company has 5 million shares outstanding and its current stock price is $20, it has a market capitalization of $100 million.
Market cap, or market capitalization, is one way of measuring a company's total value, based on outstanding shares of stock. A company's market cap will fluctuate with its share price. Investors can use market cap to gauge public interest and company strength.
Is a company worth more than its market cap? ›
Importantly, market cap doesn't necessarily reflect how much a business is actually worth because it doesn't account for certain crucial factors, such as a company's cash reserves or debt.
Does market cap really matter? ›
Generally, market capitalization corresponds to a company's stage in its business development. Typically, investments in large-cap stocks are considered more conservative than investments in small-cap or midcap stocks, potentially posing less risk in exchange for less aggressive growth potential.
Is market value the same as market cap? ›
Market capitalization is essentially a synonym for the market value of equity. A company's market cap is a single incontrovertible figure because it's the number of outstanding shares multiplied by the price of a share. Market valuations can vary depending on the exact metrics and multiples that an analyst uses.
Which is higher fair market value or market value? ›
Market value may be less or more than fair market value (it's believed to be a more accurate reflection of value), which is why fair market value is used by businesses and governments rather than market value.
What is an example of a market value? ›
To calculate the market value of a company, you would take the total shares outstanding and multiply the figure by the current price per share. For example, if ABC Limited has 50,000 shares in circulation on the market, and each share is priced at $25, its market value would be $1.25 million (50,000 x $25).
Does higher market cap mean higher value? ›
Market cap does not affect stock price; rather, market cap is calculated by analyzing the stock price and number of shares issued. Although a blue-chip stock may perform better because of organizational efficiency and greater market presence, having a higher market cap does not directly impact stock prices.
Why is market cap higher than book value? ›
Key Takeaways
When the market value is less than book value, the market doesn't believe the company is worth the value on its books. A higher market value than book value means the market is assigning a high value to the company due to expected earnings increases.
What is considered a good market cap? ›
Sizing up stocks
Large-cap: Market value of $10 billion or more; generally mature, well-known companies within established industries. Midcap: Market value between $3 billion and $10 billion; typically established companies within industries experiencing or expected to experience rapid growth.
Is brand value and market cap the same? ›
Brand value is difficult to accurately estimate, and it is based on multiple assumptions. Further, Brand value does not take into account profitability, growth rates, assets, debt, and many other factors that are in fact included in market cap.
