What is Market Value Of Equity?
Let me explain market value of equity directly: it's the total dollar value of a company's equity, and you might know it as market capitalization. You calculate this by multiplying the current stock price by the total number of outstanding shares. This value changes constantly because the stock price and sometimes the shares outstanding shift. I use it to gauge a company's size, which helps you diversify your investments across different company sizes and risk levels.
If you're looking to figure this out yourself, check the equity section of the company's balance sheet for the total number of shares outstanding.
Understanding Market Value Of Equity
Think of a company's market value of equity as the total value that investors assign to the company right now. It can swing a lot during a trading day, especially with big news like earnings reports. Large companies usually have more stable market values because they attract a diverse group of investors. On the other hand, small, thinly traded companies can see their market value jump or drop by double digits from just a few trades, which is why they're vulnerable to market manipulation.
Key Takeaways
- Market value of equity shows how much investors believe a company is worth today.
- Market value of equity equals market capitalization, calculated by multiplying total outstanding shares by the current share price.
- Market value of equity fluctuates throughout the trading day as the stock price changes.
Calculating Market Value of Equity
You calculate market value of equity simply by multiplying the number of outstanding shares by the current share price. For instance, on March 28, 2019, Apple's stock traded at $188.72 per share, and after their buyback program, shares outstanding were 4,715,280,000. So, you get: $188.72 times 4,715,280,000 equals $889,867,641,600. People often round this to $889.9 billion for simplicity.
The Difference Between Market Value of Equity, Enterprise Value and Book Value
You can compare market value of equity to other metrics like book value and enterprise value. Enterprise value builds on market value of equity by adding total debt and subtracting cash and cash equivalents, giving a sense of what a takeover might cost.
Market value of equity stands apart from book value of equity, which comes from the stockholders' equity on the balance sheet. Book value looks at owned assets and owed liabilities, while market value often factors in future growth potential beyond the current balance sheet. If book value exceeds market value, it might signal a market oversight, making the company a potential value investment.
Market Value of Equity and Market Profile
Generally, there are three levels of market capitalization, each with its own characteristics. Companies under $2 billion are small caps—typically young, growing, risky but with high potential. Those between $2 billion and $10 billion are mid-caps, offering a mix of growth and stability. Over $10 billion marks large caps—mature companies that provide stability over rapid growth. By investing in each category, you achieve diversification in assets, sales, maturity, management, growth rates, prospects, and market depth.
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