What is Market Cap
Market Cap, better known as Market Capitalization, refers to the total market value of a certain company’s shares of stock. To get this value, the total number of shares is multiplied by the current market price per
share.
To help you understand better, an example will be given below.
Let’s say a company has a total of 5 million shares. Each share sells for $300 each. We simply multiply these two values and we get a $1.5 billion market capitalization or market cap.
This simple concept is used to determine the company’s size, rather than
using total assets or sales figures. Furthermore, the market cap value is used to determine whether a takeover candidate exhibits a good value or not to the acquirer.
This article will discuss the topic further by explaining subtopics such as the importance of market cap, the market cap of the FTSE 100 compared to the S&P 500, and if market caps include debt.
Does Market Cap Matter
Determining the value of a company is an important task. Using the concept of market capitalization makes the accomplishment of this task easier by estimating a company’s value.
The value of a company helps the investors decide whether they will invest or not, considering the risks.
To establish a company’s market cap, it undergoes a process called Initial Public Offering (IPO). Let’s further explain this process.
First, the company that wishes to go public enlists an investment bank to derive the company’s value, to employ valuation techniques, and to determine the number of shares to be offered to the public, including its price.
A company having a value of $300 million might want to issue $20 million
shares at a rate of $20 per share. It depends on the company’s preference.
Once the company goes public and starts trading, the company price, and the price for each share is determined by the current supply and demand in the market.
A high demand would result in a price increase while a low demand would drive down the company price.
Simply put, the market cap estimates the company’s value in realtime. So yes it is a very important metric to use when evaluating a stock.
What is the Market Cap of FTSE 100? VS. S&P 500
People wonder why the FTSE 100 has underperformed compared to the S&P 500. To understand why this a little better, let’s take a closer look at the two indices.
Since 2010, the FTSE 100’s index value increased by about 20%, while the S&P 500’s index value raised by 88%.
This is a very notable difference, the index value of the FTSE 100 is facing a much slower climb. If you are not familiar with these two indexes, here are some bits of background to help you.
The FTSE 100 is an index of the top 100 companies by market capitalization traded on the London stock exchange. It is primarily comprised of businesses whose incomes are derived overseas.
Moreover, 25% of these companies belong in the natural sector and 18% belong in the financial services.
Let’s move on to the S&P 500 index. This index is one of the best indexes for observing economic growth. It is comprised of the top 500 US companies, providing a much larger pool to examine.
The S&P 500 index also helps investors see a fair picture of growth without bias towards a sector’s performance.
At a glance, investors can see that the FTSE 100 has underperformed compared to its peers. Even if we looked at the top 500 UK companies it still would not compare to the S&P 500.
The FTSE 100 does produce a decent dividend yield though. So is a good choice for dividend investors who want some stability. Exchange-Traded Funds try to closely track these indices, gaining or losing value with the market as a whole.
Does Market Cap Include Debt?
Market capitalization excludes some of the important facts in the overall value of a company.
A common question people ask is whether the market cap includes debt or not. The answer is no, the market cap does not include debt.
The market cap doesn’t consider the company’s debt. It’s important to remember that since the market cap provides only an estimation of the company’s value, it is understandable that it will leave some important values out of the calculation.
Conclusion
The market capitalization value gives you an estimated insight into a company’s value.
The next time you read about a company’s stock experiencing a great shift, you can try looking up its market cap before and after. After that, you can compare these values to the market cap values of other companies.
That concludes the importance of market capitalization. Yet another key metric in evaluating a stock.
Trading 212 Free Share
Grab your free share from Trading 212 now.
Sign up with the link below to get started now.
Do you want to get a free stock share worth up to £100? You only need to deposit £1 to get the free share!
Create a Trading 212 account using this link
We both get a free share!
None of the above should be used as financial advice, I am not a professional. Always do your own research.
Thanks,
Sean
