Market Value of Equity
Market value of equity, also known as market capitalization, is the total dollar value investors place on a company’s equity. It is calculated by multiplying the current share price by the total number of outstanding shares.
How to calculate
- Find the current share price.
- Find the total number of outstanding shares (reported in the company’s financial statements).
- Multiply share price × shares outstanding.
Example:
– Share price: $188.72
– Shares outstanding: 4,715,280,000
– Market value of equity = $188.72 × 4,715,280,000 ≈ $889,867,641,600 (often quoted as $889.9 billion)
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Why it matters
- Measures company size and investor perception of value.
- Changes continuously with the stock price and occasional share count changes (e.g., buybacks or issuances).
- Large-cap companies generally show more stable market values; small-cap and thinly traded stocks are more volatile and can be more susceptible to price swings or manipulation.
- Helps investors diversify by allocating across companies of different sizes and risk profiles.
How it compares to other valuations
- Enterprise value (EV): Starts with market value of equity and adjusts for debt, cash, and minority interests to estimate the total takeover cost of a company. EV = Market value of equity + debt − cash.
- Book value of equity: Based on shareholders’ equity reported on the balance sheet (assets − liabilities). Book value reflects historical accounting values, while market value reflects current investor expectations and growth prospects.
- Discrepancies between market and book value can signal market expectations, undervaluation, or potential investment opportunities (e.g., market value below book value may suggest a value buy).
Market-cap categories and typical profiles
- Small cap: under $2 billion — often younger, higher growth potential, higher risk and volatility.
- Mid cap: $2 billion to $10 billion — balance of growth potential and stability.
- Large cap: over $10 billion — typically mature companies offering more stability and lower relative growth.
Owning stocks across these categories can provide diversification across maturity, growth prospects, and market depth.
Key takeaways
- Market value of equity = current share price × shares outstanding.
- It is a dynamic measure reflecting investor sentiment and company size.
- Compare it with enterprise value and book value to get a fuller picture of valuation.
- Use market-cap categories to guide portfolio diversification and risk management.
Understanding market value of equity helps investors assess company size, compare valuations, and make more informed allocation decisions.