Primarily used with publicly traded companies, market capitalization and market value are two common investing terms that are oftentimes confused or used interchangeably. One is objective, the other can be subjective, and they differ in how they’re calculated and applied. In this blog, we will define market capitalization, market value, and discuss their critical differences and how they can be used.
At its simplest, market capitalization, or market cap, uses a company’s stock price to determine its value. It is the number of outstanding shares a company has multiplied by the price of one single share. So, for a company with 20 million outstanding shares and a stock price of $50 per share, the market cap would be $1 billion.
Market cap is used to determine a company’s value; however, because it uses stock prices subject to fluctuation for reasons that vary from company performance to global economic concerns, it’s not the most precise measurement. Stock prices are subject to the whims of the market and can be impacted by several different factors. Because of this, market cap is better used to measure the size of a company. Oftentimes, investors will group stocks into broad categories of small-cap, mid-cap, and large-cap:
- Small-cap: Market cap of $3 billion less, often younger companies in emerging markets or industries
- Mid-cap: Market cap ranging from $3 billion to $10 billion, usually established companies in growing industries
- Large-cap: Market cap of $10 billion or greater, usually established, well-known companies
Investing in companies that have varying cap sizes can be a good way for investors to add diversity to their investment portfolio.
Determining the market value of a company is far more complex than determining its market capitalization. It measures a company’s monetary value and is based on measures such as price-to-earnings ratio, price-to-sales ratio, return-on-equity, and more. Higher valuations for these measures equate to a higher market value.
Market value can be impacted by several other factors, including the company’s debt, profitability, sector in which it operates, and the overall market factors. Market value can vary significantly over time and is heavily impacted by business cycles. During bear markets, market values tend to go down, while during bull markets they tend to grow.
Although determining market value is more complicated than determining market cap, it is also a measure that is relatively subjective, as analysis can be speculative. For example, Company A is investing in new, future technology and is being valued higher than Company B, which isn’t making similar investments but is hitting similar revenue numbers. There is no guarantee that Company A’s investments will translate to added future value for shareholders. However, because market value considers many factors, it often considered a more robust portrait of a company’s standing.
Oftentimes, market cap and market value are used interchangeably, which is understandable, as they sound similar. The key difference to remember is that market cap measures the market value of a company’s equity while the market value measures overall market worth. Additionally, you will see that market cap, because it’s based on current share price, is one hard, indisputable number. On the other hand, market value can vary depending on who is analyzing the company and what metrics they’re looking at to make their calculations.
The information presented here is for general informational purposes only and is not intended to be, nor should it be construed or used as, comprehensive offering documentation for any security, investment, tax or legal advice, a recommendation, or an offer to sell, or a solicitation of an offer to buy, an interest, directly or indirectly, in any company. Investing in both early-stage and later-stage companies carries a high degree of risk. A loss of an investor’s entire investment is possible, and no profit may be realized. Investors should be aware that these types of investments are illiquid and should anticipate holding until an exit occurs.
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