Investing can be confusing. There are a lot of terms and phrases that are thrown around out there by financial experts. Let me explain one of them. Market cap.
What is Market Cap Used For?
Market cap (also called market capitalization) is for a few different reasons. However, the most common use for market cap is to determine the size of a company.
Someone might say, “Tesla is a $1 trillion company”. This person means that the size of Tesla is $1 trillion.
But why would someone need to know the size of a company? While there are several reasons that someone would need/want to know the size of the company, the main reason is so that that company can be compared to another.
In order to do that properly, you need to know how to calculate market cap. (Don’t worry, it’s not difficult at all.) It is a really useful tool for you to have as you go throughout your investing journey.
How to Calculate the Size of a Company
As I said before, market cap is generally used to calculate the size of a company.
Here is how you do it.
The number of shares outstanding * the market price per share = Market Cap
That might seem complicated, but let me break it down.
The number of shares outstanding is simply the number of shares that are out there in the marketplace of that company being traded.
The market price per share is simply the price the stock is trading at.
Here is an example:
Bobby’s Beer is a fictional company. They have issued shares of stock to the public. Currently they have 1,000,000 shares of stock outstanding.
And right now their stock is trading at $40/share.
So the calculation looks like this:
1,000,000 * $40 = $40,000,000
This means that Bob’s Beer is a $40,000,000 company.
Wayne’s Whisky is another fictional company. They have also issued shares of stock to the public. Currently they have issued 800,000 shares of stock.
And right now their stock is trading at $45/share.
Wayne’s Whisky calculation looks like this:
800,000 * $45 = $36,000,000
| Shares Outstanding | Stock Price | Market Cap | |
| Bob’s Beer | 1,000,000 | $40 | $40,000,000 |
| Wayne’s Whisky | 800,000 | $45 | $36,000,000 |
So even though Wayne’s Whisky is trading at a higher stock price ($45 compared to $40 per share), their company is less valuable than Bob’s Beer.
Final Thoughts
When you are comparing companies when investing, knowing how market cap is calculated is really important.
You really need to know how to compare one company to another.
I am here to help you!
You can do this!
Until next time!
0 Comments