Market Value of Equity

This article aims at helping you understand the meaning of the concept, market value of equity, and the formula for the same. So, continue reading to know more...
WealthHow Staff
Market value of equity is nothing but market capitalization of a firm. It is defined as the total value of all the outstanding shares of a company at any given time. The market capitalization of different firms is bound to be different. It depends on many factors and market capitalization calculation helps us to arrive at several important conclusions.

The Concept of Market Value of Equity

The market value of equity is actually calculated by multiplying a number of outstanding shares of a company with its current market price. Both these factors, on which the market capitalization of a company depends are not constant all the time and hence the market capitalization is bound to change. So, when the stock price of a company goes up consistently, overall market capitalization will go up as well. As per their market capitalization, companies are classified as large cap, mid cap and small cap. The large caps are those which have a very high market capitalization, due to soaring stock prices. On most occasions, these companies have very sound fundamentals and post good financial results. It has been observed that stock price movements of mid cap companies are more volatile and aggressive than the large cap stocks. Though profit margins in mid caps are high, many financial experts of the stock markets advise conservative retail investors to go with the large cap stocks for more safety and surety of returns. The market cap of all stocks, when clubbed together, counts for the total market capitalization of the entire exchange.

Market capitalization of a company can help us analyze whether the stock is available at expensive, cheap or fair valuations. By correctly understanding valuations of stocks, we can easily take positions in the good ones or go short in the weak ones. Often, the market capitalization of a stock is compared to that of its peers for stock research and technical analysis. A sudden rise in the market capitalization of a company, without the backing of sound fundamentals and technical structure can be a sign of danger for investors as the stock price can crash with heavy profit booking.

Finding Market Value of Equity

The market capitalization calculation can be done with the help of a simple formula which has been stated below:

Market capitalization = Share price x No. of outstanding shares.

From this formula, it is clear that in order to obtain market capitalization, you require the values for share price and number of outstanding shares. Due to the changing nature of these values, you can take the average value of share price in a particular period and that of the outstanding shares. Their multiplication will give you the market capitalization of the company. Market capitalization should not be the only reason to buy stocks of companies. You also need to study the balance sheet, profit and loss statement and cash flow statement before making your equity investments. Try to analyze and understand the business model of the company well so that you do not miss the opportunity to earn high returns.