Market Capitalisation
Market capitalisation is defined as the total value of all the outstanding shares of a company. The process of calculation of the market capitalisation involves multiplying the number of outstanding shares with the current share price of a company. It is a very common practice for the market analysts to use these figures for the purpose of designating a company’s size, as a number of stock market indexes are generally weighted by the market capitalisation.
Since the market capitalisation of an organisation is totally dependent on its share price, it is prone to a great deal of fluctuation on a month-to-month or even day-to-day basis. The market capitalisation does not take into account the equity value of a firm. Only a comprehensive analysis of the fundamentals of a company can help to find out if the shares are undervalued or overvalued by the market. It means that the market price of a share is a determining factor behind how much the investors are willing to pay for the stock.
Although it helps to measure the cost of buying all the company’s shares, the market capitalisation cannot determine the total cost of acquiring a company in a merger transaction. A better method to calculate the price of acquiring any business outright would be the enterprise value.
Equity
The shareholder equity is often seen as a much more accurate estimate of the net worth of a company. Equity is nothing more than a simple statement of the difference between the assets and liabilities of an organisation. It is also considered as the net profit that will remain in case the company is liquidated or sold at a fair value.
The equity of an investor within a company represents the actual value of their stake in the organisation. The investors who hold the stock within a company, for example, generally show more interest in their personal equity stake in the company, which is represented by the total number of shares they hold in an organisation. But since their personal equity is also tied to the total equity of a company, the investors will also have an interest in knowing its overall earnings and performance over an extended period.
Owning the equity of a company over a period of time ideally translates into greater capital gains and dividends for the stockholder. A shareholder also has the right to vote in the elections for the board of directors and have a say in the running of a company. These benefits also help to promote the interest of the shareholder in the company.
Difference between Market Capitalisation and Equity
It is advantageous to make a comparison between the market capitalisation and shareholder equity of a company on a historical basis. Continuous increase of the difference is an indication of higher confidence by the investor in the growth and profits of a company. A steady decrease, on the other hand, in the difference amount is a signal that the company has reached its maturity within its market. There are several points of difference between market capitalisation and equity and we will discuss them below to get a deeper insight into this topic:
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. |
It is possible to determine the company’s market capitalisation by multiplying the total number of the outstanding shares with the market price of a single share. | The shareholder equity of a company is calculated by subtracting its liabilities from the assets. |
The market capitalisation of a company is almost always on the higher side when compared to the shareholder equity as the investors tend to consider many factors like the earnings, sales, emerging market trends and patents. | A company’s shareholder equity is almost always on the lower side when compared to the market capitalisation as the investors tend to consider many factors like the earnings, sales, emerging market trends and patents. |
Conclusion
Both market capitalisation and equity have several differentiating factors. Shareholders often use the two interchangeably to evaluate the standing and financial position of a company, and make investment decisions based on it. Although there are areas of difference between market capitalisation and equity, the investors need to look at both these values to make a sound financial decision about their investment.
Frequently Asked Questions
Q1
How can you determine the equity and market capitalisation of a company?
One of the primary methods to determine shareholder equity and market capitalisation in a company is by reading its annual reports. The shareholder equity is always reported on the balance sheet of a company along with their assets and liabilities. It is important to note that the assets of a company must always be equal to the total of their liabilities and shareholder equity. The market capitalisation of a company may be reported in their annual report, but it is possible to determine that value by using the figures related to the total number of outstanding shares and share price on a specific day.
Q2
What is the significance of a continuous increase in difference between a company’s shareholder equity and their market capitalisation?
The significance of a continuous increase in difference between a company’s shareholder equity and their market capitalisation is a general indication of higher investor confidence in the profits and growth of an organisation.
Q3
What is the significance of a continuous decline in difference between a company’s shareholder equity and their market capitalisation?
The significance of a continuous decline in difference between a company’s shareholder equity and their market capitalisation is a general indication of lower investor confidence in the profits and growth of an organisation. It also indicates that the company may be reaching stability and maturity in terms of its growth levels.
Also See:
- Differences Between Debt and Equity Capital
- Differences Between Equity Share Capital and Preference Share Capital
- What Are Equity Shares
- Difference Between Venture Capital and Private Equity
- Meaning and Characteristics of Not for Profit Organisations
