Market Capitalization vs. Equity: An Overview
Two of the most common ways of assessing a company's value are market capitalization and equity (also known as shareholder equity). Each term describes a different way of looking at a company's value. It is helpful to consider both to get the most accurate picture of a company's worth.
Market Capitalization
Market capitalization is the total dollar value of all outstanding shares of a company. It is calculated by multiplying the current share price by the number of outstanding shares.
Market analysts commonly use this figure to designate a company's size, as many stock market indexes are weighted by market capitalization. Because market capitalization is dependent on share price, it can fluctuate greatly from month to month, or even from day-to-day.
Key Takeaways
- Market capitalization is the total dollar value of all outstanding shares of a company.
- Equity is a simple statement of a company's assets minus its liabilities.
- It is helpful to consider both equity and market capitalization to get the most accurate picture of a company's worth.
Market capitalization does not measure theequityvalue of a company. Only a thorough analysis of a company'sfundamentalscan do that. Shares are often overvalued orundervaluedby the market, meaning the market price determines only how much the market is willing to pay for its shares.
Although it measures the cost of buying all of a company's shares, the market cap does not determine the amount the company would cost to acquire in a merger transaction. A better method of calculating the price of acquiring a business outrightis theenterprise value.
Equity
Shareholder equity is considered a more accurate estimate of a company's actual net worth. Equity is a simple statement of a company's assets minus its liabilities; it could also be seen as the net profit that would remain if the company was sold or liquidated at fair value. Unlike market capitalization, equity does not fluctuate day to day based on the stock price.
Equity represents the true value of one’s stake in an investment. Investors who hold stock in a company, for example, are usually interested in their personal equity in the company, represented by their shares. Yet, this kind of personal equity is directly tied to the company's total equity, thus a stockholder will also have aconcernfor the company's earnings.
Owning stock in a company over time ideally yieldscapital gainsfor the shareholderand potentially dividends. A shareholder may also get the right to vote inthe board of directors'elections. These benefits further promote a shareholder’s ongoing interest in the company.
Key Differences
Market capitalization value is nearly always greater than equity value since investors figure in factors such as a company's expected future earnings from growth and expansion. It can be helpful to make a historical comparison between market capitalization value and equity value to see if there is a trend one way or the other.
If market capitalization has grown steadily higher and further above equity value, this indicates increased confidence on the part of investors.
Both market capitalization and equity can be found by looking at a company's annual report. The report shows the number of outstanding shares at the time of the report, which can then be multiplied by the current share price to obtain the market capitalization figure. Equity appears on the company's balance sheet.
FAQs
Unlike market capitalization, equity does not fluctuate day to day based on the stock price. Equity represents the true value of one's stake in an investment. Investors who hold stock in a company, for example, are usually interested in their personal equity in the company, represented by their shares.
What is the difference between the capital market and the equity market? ›
Capital markets are used primarily to sell financial products such as equities and debt securities. Equities are stocks that represent ownership shares in a company. Debt securities such as bonds are interest-bearing IOUs.
What is the difference between equity and capital? ›
Equity helps determine whether a company is financially stable long term, while capital determines whether a company can pay for the short-term production of products and services. Capital is a subcategory of equity, which includes other assets such as treasury shares and property.
What is the difference between market capital and share capital? ›
Difference between Market Capitalisation and Shares Outstanding. Market capitalisation is defined as the total market value of a company at a particular moment in time. Shares outstanding are defined as the total number of shares of a company that are currently being held by its shareholders.
What is the difference between market capitalization and net worth of a company? ›
Net worth is the book value (Assets - Liabilities). The market cap of a company is the value of all the company shares trading in the stock market. The market cap could be higher or lower than the book value. In most cases it is higher.
What is the difference between market cap and equity? ›
Market capitalization is the total dollar value of all outstanding shares of a company. Equity is a simple statement of a company's assets minus its liabilities. It is helpful to consider both equity and market capitalization to get the most accurate picture of a company's worth.
What is the difference between the financial market and the equity market? ›
The equities (stock) market is a financial market that enables investors to buy and sell shares of publicly traded companies. The primary stock market is where new issues of stocks are sold. Any subsequent trading of stocks occurs in the secondary market, where investors buy and sell securities they already own.
What is an example of equity? ›
Equality on the other hand, means everyone is treated the same exact way, regardless of a person's needs or other individual differences. For example, in equity, the coach takes into consideration the specific needs of each player's position on the team, and provides the shoes they need to be successful.
Why is equity capital better? ›
Less burden.
With equity financing, there is no loan to repay. The business doesn't have to make a monthly loan payment which can be particularly important if the business doesn't initially generate a profit. This in turn, gives you the freedom to channel more money into your growing business.
What is the difference between cost of capital and equity? ›
Cost of equity and cost of capital are two useful metrics for determining how easy it is for a company to raise the funds it needs to expand and do business. The cost of equity refers to the cost of raising money by selling shares, while the cost of capital also includes the cost of borrowing.
Capital is a broad term for anything that gives its owner value or advantage, like a factory and its equipment, intellectual property like patents, or a company's or person's financial assets. Even though money itself can be called capital, the word is usually used to describe money used to make things or invest.
What has the highest liquidity? ›
Cash is the most liquid asset possible as it is already in the form of money. This includes physical cash, savings account balances, and checking account balances.
Is share capital an asset or equity? ›
The share capital is the part of a company's equity that it has raised from issuing common or preferred shares and is different from other types of equity accounts.
What is a good PE ratio? ›
Typically, the average P/E ratio is around 20 to 25. Anything below that would be considered a good price-to-earnings ratio, whereas anything above that would be a worse P/E ratio. But it doesn't stop there, as different industries can have different average P/E ratios.
Does company equity count as net worth? ›
Net Worth in Business
Net worth is known as book value or shareholders' equity in business. The balance sheet is also known as a net worth statement. The value of a company's equity equals the difference between the value of total assets and total liabilities.
What does market cap tell you? ›
Market cap, or market capitalization, is one way of measuring a company's total value, based on outstanding shares of stock. A company's market cap will fluctuate with its share price. Investors can use market cap to gauge public interest and company strength.
Are equity markets capital markets? ›
The equity capital market is a subset of the broader capital market, where financial institutions and companies interact to trade financial instruments and raise capital for companies.
What is capital market in simple words? ›
Capital markets are financial markets that bring buyers and sellers together to trade stocks, bonds, currencies, and other financial assets. Capital markets include the stock market and the bond market. They help people with ideas become entrepreneurs and help small businesses grow into big companies.
What is equity market in simple words? ›
The equity market is a place for buying and selling stocks and shares of companies. These transactions can occur either over the counter or on stock exchanges. Also known as the stock market or share market, it provides a common platform for buyers and sellers to trade equities or shares.
What is the difference between capital markets and private equity? ›
Investment banks find businesses and then go into the capital markets looking for ways to raise money from the investment crowd. Private equity firms, on the other hand, collect high-net-worth funds and look for investments in other businesses.
