What is Market Value of Equity?
Market value of equity is the total dollar value of a company’s equity, more commonly referred to as market capitalization. This measure of a company’s value is calculated by multiplying the current stock price by the total number of outstanding shares. Because these variables can fluctuate frequently, the market value of equity is always changing. It’s a key metric used to gauge a company’s size and is indispensable for investors looking to diversify their portfolio across companies of different scales and varying risk levels.
Investors interested in calculating the market value of equity can find the total number of shares outstanding in the equity section of a company’s balance sheet.
A Deeper Look at Market Value of Equity
Market value of equity is essentially the valuation of a company as determined by investor sentiment. This value can exhibit significant volatility within a single trading day, especially during pivotal financial news like earnings releases. Large, well-established companies tend to display more stability in their market value of equity due to their diverse and broad investor base. Conversely, smaller, thinly-traded companies can experience double-digit fluctuations, often making them susceptible to market manipulation.
Key Insights
- Market value of equity signifies what investors believe a company is worth in the market.
- This valuation is equivalent to market capitalization, both calculated by multiplying total shares outstanding by the current share price.
- The market value of equity fluctuates throughout the trading day, reflecting changes in the stock price.
How to Calculate Market Value of Equity
Calculating market value of equity involves the simple multiplication of the number of shares outstanding by the current share price. For instance, on March 28, 2019, Apple Inc. had a stock price of $188.72 per share. Given their outstanding shares were 4,715,280,000 after a stock buy-back program, the calculation for Apple’s market value of equity is as follows:
Stock Price ($188.72) x Shares Outstanding (4,715,280,000) = $889,867,641,600
For simplification, this market value of equity is often rounded to $889.9 billion.
Distinguishing Between Market Value of Equity, Enterprise Value, and Book Value
Market value of equity can be juxtaposed with other financial metrics such as book value and enterprise value. Enterprise value takes into account the market value of equity along with total debt, minus cash and cash equivalents, to provide an overview of a company’s potential acquisition cost.
Market value of equity is different from the book value of equity, which is derived from the stockholders’ equity line item on a company’s balance sheet. The book value focuses on the company’s owned assets and owed liabilities, while the market value of equity typically includes some projection of future growth potential. When the book value exceeds the market value of equity, it could signal a market oversight, making the company a potential value investment.
Market Value of Equity and Market Capitalization Profiles
Companies are generally categorized into three primary levels of market capitalization:
- Small Cap: Market capitalization less than $2 billion.
- Mid Cap: Market capitalization between $2 billion and $10 billion.
- Large Cap: Market capitalization over $10 billion.
Each category has distinctive profiles that help investors understand company behavior. Small caps are often young companies with significant growth potential but higher risk. Large caps tend to be stable, mature companies with potentially lower, but more predictable growth. Mid-caps offer a balance between growth potential and stability. By holding stocks across these categories, investors achieve diversification in assets, sales profiles, company maturity, management quality, growth rates, and market depth.
Related Terms: Book Value, Enterprise Value, Stock Price, Investor Insights.
