Market Capitalization vs. Equity: An Overview
Two of the most common ways of assessing a company's value are market capitalization and equity (also known as shareholder equity). Each term describes a different way of looking at a company's value. It is helpful to consider both to get the most accurate picture of a company's worth.
Market Capitalization
Market capitalization is the total dollar value of all outstanding shares of a company. It is calculated by multiplying the current share price by the number of outstanding shares.
Market analysts commonly use this figure to designate a company's size, as many stock market indexes are weighted by market capitalization. Because market capitalization is dependent on share price, it can fluctuate greatly from month to month, or even from day-to-day.
Key Takeaways
- Market capitalization is the total dollar value of all outstanding shares of a company.
- Equity is a simple statement of a company's assets minus its liabilities.
- It is helpful to consider both equity and market capitalization to get the most accurate picture of a company's worth.
Market capitalization does not measure theequityvalue of a company. Only a thorough analysis of a company'sfundamentalscan do that. Shares are often overvalued orundervaluedby the market, meaning the market price determines only how much the market is willing to pay for its shares.
Although it measures the cost of buying all of a company's shares, the market cap does not determine the amount the company would cost to acquire in a merger transaction. A better method of calculating the price of acquiring a business outrightis theenterprise value.
Equity
Shareholder equity is considered a more accurate estimate of a company's actual net worth. Equity is a simple statement of a company's assets minus its liabilities; it could also be seen as the net profit that would remain if the company was sold or liquidated at fair value. Unlike market capitalization, equity does not fluctuate day to day based on the stock price.
Equity represents the true value of one’s stake in an investment. Investors who hold stock in a company, for example, are usually interested in their personal equity in the company, represented by their shares. Yet, this kind of personal equity is directly tied to the company's total equity, thus a stockholder will also have aconcernfor the company's earnings.
Owning stock in a company over time ideally yieldscapital gainsfor the shareholderand potentially dividends. A shareholder may also get the right to vote inthe board of directors'elections. These benefits further promote a shareholder’s ongoing interest in the company.
Key Differences
Market capitalization value is nearly always greater than equity value since investors figure in factors such as a company's expected future earnings from growth and expansion. It can be helpful to make a historical comparison between market capitalization value and equity value to see if there is a trend one way or the other.
If market capitalization has grown steadily higher and further above equity value, this indicates increased confidence on the part of investors.
Both market capitalization and equity can be found by looking at a company's annual report. The report shows the number of outstanding shares at the time of the report, which can then be multiplied by the current share price to obtain the market capitalization figure. Equity appears on the company's balance sheet.
FAQs
Key Takeaways. Market capitalization is the total dollar value of all outstanding shares of a company. Equity is a simple statement of a company's assets minus its liabilities. It is helpful to consider both equity and market capitalization to get the most accurate picture of a company's worth.
What is the difference between market cap and share equity? ›
Market capitalisation is typically higher than shareholder equity as investors consider factors like earnings, sales, emerging market trends, and patents. Shareholder equity is typically lower than market capitalisation as investors consider factors like earnings, sales, emerging market trends, and patents.
Is market cap the same as owner's equity? ›
Market capitalisation is the total market value of a company at a particular moment in time. Shareholder equity is referred to as the total net worth of a company.
Is equity the same as market value? ›
Equity value, commonly referred to as the market value of equity or market capitalization, can be defined as the total value of the company that is attributable to equity investors. It is calculated by multiplying a company's share price by its number of shares outstanding.
What does market capitalization tell you? ›
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.
Why is market cap more important than share 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.
How would you define equity? ›
The term “equity” refers to fairness and justice and is distinguished from equality: Whereas equality means providing the same to all, equity means recognizing that we do not all start from the same place and must acknowledge and make adjustments to imbalances.
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.
Does market cap include debt and equity? ›
Market capitalization omits some important facts in the overall valuation of a company. Most importantly, it does not take into consideration the company's debt.
Why is market cap important? ›
A company's market cap might help give you a sense of how risky its stock is. Larger companies are often more established and have less volatile stocks. Smaller companies may have more volatile stocks, but in some cases may be able to grow faster than very large companies.
Equity market capitalization refers to the total value of all shares traded on the equity market. It is derived by adding up the individual market caps of all stocks in the market, providing an aggregate figure.
Is market cap the value of a company? ›
Market capitalization (or market cap) is the total value of a publicly traded company's outstanding stock. It's one way to estimate the value of a company, and it's a useful tool for comparing public companies across industries.
How to calculate market capitalization? ›
Market capitalization (market cap) is the total value of a company's outstanding shares of stock. It is calculated by multiplying the current market price of one share by the total number of outstanding shares.
Does home equity include market value? ›
Your home equity value is the difference between the current market value of your home and the total sum of debts (mainly, your primary mortgage) registered against it. The credit available to you as a borrower through a home equity loan depends on how much equity you have.
Is equity a market value or book value? ›
Book value is equal to the value of the firm's equity, while market value indicates the current market value of any firm or asset. An investor can calculate the book value of an asset when the company reports its earnings every quarter, whereas market value changes every moment.
What is equitable value vs market value? ›
Although in many cases the price that is fair between two parties will equate to that obtainable in the market, there will be cases where the assessment of Equitable Value will involve taking into account matters that have to be disregarded in the assessment of Market Value, such as certain elements of Synergistic ...
Is a higher market value of equity better? ›
Equity plays a vital role in determining the financial stability and health of a company. It is a key factor in assessing the company's solvency, as a higher equity base indicates a lower level of financial risk.
