What is the market capitalization and why it is important?

Market capitalization is the total value of a company’s stock in the market. It is calculated by multiplying the total number of shares outstanding and the share price. For example, if a company has 1,00,000 shares and the share price is Rs. 50, we say the company has a market capitalization of Rs. 50,00,000.

Market capitalization is an important factor to understand the company’s size w.r.t it’s peers along with an understanding of the risk factors of the company.

What is the market capitalization formula?

The market capitalization of a company is calculated with the below formula:

Market   Capitalization  =     No. of shares outstanding* Share price of the company

Is market capitalization the same as the market value?

Market capitalization is a metric on the basis of the share price of the company. The investors use it to define the value of a company. However, market value is more complex and is dependent on various other metrics such as price-to-earnings ratio, price-to-sales ratio, etc. Factors such as the sector in which the company operates, the debt structure of the company, etc. also plays an important role to determine the market value.

What is the market capitalization of NSE?

The National Stock Exchange of India Limited is a financial exchange. NSE offers trading facilities to investors across India. It processes a huge trading volume on a daily basis smoothly. It has a market capitalization of US $ 2.25 trillion as of 2018.

Does market capitalization include debt?

Market capitalization is calculated by multiplying the number of shares outstanding of a company with its share price. You should not consider while calculating the market value of a company.

Why is market capitalization higher than the book value?

The book value of a company is the difference between the total assets and total liabilities. The market capitalization of a company is calculated by multiplying the number of shares outstanding with its share price.

Market capitalization is higher than the book value. This is majorly due to the fact that the market is assigning a higher value to that particular business. It can be because of reasons such as growth, expansion, profits, etc.

Does market capitalization change every day?

Since market capitalization is a factor of the number of shares and the current share price, as long as there is a change in either of them, the market capitalization will change.

How does market capitalization increase?

Market capitalization increases if there is an increase in the share price of the company or the number of shares outstanding. For example, if the share price today of a company is Rs. 10 and it has 10,000 shares outstanding, the market capitalization of the company would be Rs. 1,00,000. Now, if tomorrow the share price increases to Rs. 12, the market capitalization will be Rs. 1,20,000.

What are the five categories of market capitalization?

Below are the categories of market capitalization:

Small-cap: Companies with market capitalization up to Rs. 500 crore are classified as small-cap companies.

Mid-cap: Companies with a market capitalization between Rs. 500 – Rs. 7,000 crore are classified as mid-cap.

Large-cap: Companies with a market capitalization between Rs. 7,000 to Rs. 20,000 crore are classified as large-cap companies.

What is a P/E ratio?

P/E ratio is the ratio of the current price of a company’s share in relation to it’s EPS (earning per share). You can calculate as per the below formula:

P/E ratio = current market price of a share/earning per share

It helps in evaluating how much the investor is willing to invest in the shares of the company for every rupee of its earnings.

Why is the market value different from book value?

Market value is dependent on various factors price to earnings ratio, price to sales ratio, growth rate, etc. whereas the book value is the difference between the total assets and liabilities of a company. The market value would generally be higher than the book value as the market is placing a higher value on the growth potential of the company. This is dependent on the growth, future prospects, overall industry, etc.

What is a low PE Ratio?

PE ratio is calculated by dividing the current market price of a share with earning per share. A low PE ratio would indicate that the current stock price is low in comparison to the earnings of the company.