Market capitalization
About this video
If Ben's and Jason's shoe companies are publicly traded, multiplying the share price by the number of shares gives the market capitalization: the market's value of each company's equity. Ben's market cap is $21.50 x 10,000 = $215,000 and Jason's is $12 x 10,000 = $120,000, both different from the book value of their equity.
You'll be able to
- calculate market capitalization as share price times number of shares.
- explain that shares are a split of owner's equity, not of the assets.
- explain why market cap usually differs from the book value of equity.
Key words
- Publicly traded
- A company whose shares are bought and sold on an exchange such as the NASDAQ or New York Stock Exchange.
- Market capitalization (market cap)
- Share price times number of shares: what the market values the company's equity at.
- Book value
- The value of equity as recorded on the company's own books: assets minus liabilities.
- Closing price
- The last price a share traded at when the exchange closed.
Transcript
Let's say that both Ben's Shoes and Jason's Shoes are publicly traded companies. And all that means is that both of their shares are traded on exchanges. Maybe it's the NASDAQ, or the New York Stock Exchange, or some other exchange. And the going price on those exchanges-- the last closing price for Ben's stock was $21.50 per share, and the last closing price for Jason's stock is $12.00 per share.
What I want to explore in this video, and probably the next few is, what is that saying for what the market thinks these businesses are worth? So in both of these situations, they have 10,000 shares. And remember, the shares are a split of the owner's equity. It's not a split of the assets.
It's a split of just the equity part, right over here. So if shareholders are willing to pay 21.50 per share for Ben's stock, and there are 10,000 shares in Ben's company. So you take 21.50 times-- I'll do it this way-- times 10,000 shares gives us a market cap.
So 21.50 times 10,000 gives us $215,000. And what this says is, look, if each of those 10,000 slices of the equity is worth 21.50, then the entire equity portion is going to be-- the market is valuing it at $215,000. And this calculation, this multiplication of the market price per share times the number of shares, this is called the market cap.
Short for market capitalization. The market cap of the company. And all it is, is what is the market valuing the equity part of Ben's company worth? Let's do the same thing for Jason's company. You have $12.00 per share times 10,000 shares. That gives us $120,000 market cap.
So the market is telling us that even though on the books, Ben's equity-- based on how he valued his assets and his liabilities-- is 135,000. The market is actually valuing this at 215,000. And in the next video, we'll think about what that means for how the market is actually valuing the business.
In the case of Jason's business, instead of $35,000 of equity-- just straight up from what's on the books-- the market is valuing this piece right here at $120,000. So hopefully that gives you a little sense of one, what shares are a share of. They're a share of the owner's equity, not of the assets.
And also gives you a good sense of what market cap is. It's the market's value of the owner's equity. And notice, in both cases-- and it's usually the case-- it's going to be a different number than the book value, the number that's actually on the books.
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