Market Capitalization Meaning

[Rick Sanchez]

I was bored as fuuck and decided to make this thread because I've seen a lot of people talking about this but  having no ideia what they are even talking about. So, here goes some info.

 

Market Capitalization Meaning: Why Price Doesn’t Always Equal Value

 

Market cap, a.k.a market capitalization, is the total market value of all of a company’s outstanding shares. It is also incorrectly known to some as what the company is really worth, or in other words the value of the business.

 

The market cap formula is simply this:

 

The amount of dollars per share of a company x The total number of shares of that company. 

 

 

People often make the mistake of looking only at stock price, because it is often the most visibly quoted number in the financial press. However, the actual dollar price of a stock means very little unless many other factors are considered. 

 

A common saying says, "Don't judge a book by its cover." Some equally valid words of wisdom for this talk would be, "Don't judge a stock by its share price .â€

 

It is very important to understand that price is not necessarily the value of a company.

 

For example, if Company A has a $100 billion market capitalization and has 10 billion shares, while Company B has a $1 billion market capitalization and 100 million shares, both companies will have a share price of $10, but Company A is worth 100 times more than Company B.

 

Price is what you pay for something, but value is what you get.

 

Let’s say you go out and buy a new album from your faves, we’ll say that the value of the album is $100. If I paid $200 dollars for the album, it doesn’t mean that it’s worth $200. That’s just what I paid for the album. I massively overpaid for it.

Now, on the other hand, if I paid $50 for it, it also doesn’t mean that it’s worth $50. That’s just what I paid.

 

What’s really important to understand is that market cap is just what we pay and not what the company is worth. If we see that the company is worth more than the market cap has it priced at, then we know that we’re essentially buying a $10 bill, for 5 bucks.

 

The market cap is the big mistake that people and investors make in assuming that whatever the market is charging for a company, is what it’s worth.

 

A lot of people say that market cap is the value of the business. In fact, that is so commonly done that professors at some of the best universities in the country have made this mistake over and over again by assuming that what the market price is of a business is what the business is worth.

 

 

Quick video explanation for those that did not read:

 

 

Don't trust me read more about it: x, x, x

 

I'm off to bed now. Good Night to y'all. 

[Delight00]

Finally someone knowledgeable said it.

[adina kim]

 

[chokemekjm]

I've seen too many people here use market cap in so many wrong ways, when they don't even know basic accounting principles like capitalization of PPE ("SM had a losses because they're building this and that!").

 

Thanks for taking the time to point this out. (Though it's not like we can get the discounted cash flows of each company to get a more accurate valuation  so I guess for now, market cap will have to do)