There is a common fallacy that the price per share of a company’s stock holds just as much significance as its market cap. People think so when choosing that company’s stocks to buy. This misconception is there particularly frequently among new investors. The market cap of a company has to be your main consideration when you evaluate a stock as it informs you that enterprise’s value.
One stock costing $50 a share is worth much less than another priced at $15 per share, but why is it the case? This question underlines a point which tends to trip up novice investors. They feel that the said price conveys a sense of market value that is relative to the other stocks. However, this is not true at all.
The cost of any particular stock has practically no significance to investors who do fundamental evaluation except for the use of it in certain isolated calculations. When you do technical analysis for stock selection, it is another story, but stick with the said evaluation for now.
The price per share is always changing, plus each organization has its own unique number of due shares, so never be concerned about the cost. Because that is the fact, it does not give a hint as to what the company’s value is. For this figure, you require the market cap or market capitalization number.
Finding Out the Equity Value
It is common knowledge that Apple, Alphabet Inc., and Facebook are some of the highest market cap companies. However, do you know how to determine the value? For this, you just need to multiply a company’s per-share cost by its overall number of due shares. This figure will give you the overall company value.
As shown below, there are some simple calculations to come up with one company’s market capitalization and compare the value to others.
- Stock price: $60
- Outstanding shares: 60 million
- Market capitalization: $60 x 60,000,000 = $3.6 billion
See the next example
- Stock cost: $10
- Due shares: 400 million
- Market capitalization: $10 x 400,000,000 = $4 billion
The companies’ per-share costs alone will not inform you anything, so look at them in this way for evaluation.
What to Learn From Equity Value
What does it tell you? Firstly, it provides you with a basis for evaluation. You should always look at a company’s stock in a given context. For instance, how does it compare to other, similar-sized companies that belong to the same sector? The market tends to categorize stocks into the following.
- Small-cap stocks: below $1 billion
- Mid-cap stocks: between $1 billion and $10 billion
- Big-cap stocks: $10 billion and above
Some analysts add mega-caps and micro-caps and others use different figures. You can discuss with financial specialists on their specific preferences, but you must know such companies’ value in your evaluation.