What does market cap mean?
The market capitalization formula is the total number of shares outstanding multiplied by the current share price. It is the amount at which a company sells in the market at any given point in time.
Market Capitalization=Total Outstanding shares * Price per share
For eg. Share price of:-
MRF limited: – 62,000
Bajaj Finance Limited: – 3,200
What do you derive from the above share prices? Which stock do you think has a larger market cap?
People usually see at the stock price and think the stock is cheap or expensive but there is no real correlation between the share price and market cap in real terms. But actually share a price is just a number on which a piece of a company is available.
For eg. The market capitalization of:-
MRF limited: – 26,000 (Crs.)
Bajaj Finance limited: – 90,000(Crs.)
Market Cap V/s Enterprise Value.
Market capitalization is already explained above. Enterprise value means market capitalization + Debt – Cash. Enterprise value is the real value at which the company sells in the market.
Market Cap V/s Assets
The market cap is already explained above. Asset means all the current and noncurrent assets present with the company i.e. on the balance sheet of the company. There is a relationship between them. But there are other components like debt, equity, etc. which cumulatively form market capitalization.
If the investor thinks in terms of market capitalization while buying a piece of a company i.e. a share then his natural attention will shift from just a stock price to the real value of the company. So, he can compare with other stocks in the same sector and also with the revenue and profits of the company he is investing in.
For eg. Mr. Warren Buffett a famous investor says when you buy farmland you always think that you are buying the entire farmland. Not just a piece of it so it is irrational while buying a stock of a company to think of the share price.
Check out my other blog: Learning about the stock market