What is the 'Market Value Of Equity'
Market value of equity is the total dollar market value of all of a company's outstanding shares. Market value of equity is calculated by multiplying the company's current stock price by its number of outstanding shares. A company's market value of equity is therefore always changing as these two input variables change. A company's market value of equity differs from its book value of equity, because the market value of equity does not consider the company's growth potential.
BREAKING DOWN 'Market Value Of Equity'
Market value of equity is a synonym for market capitalization. It is used to measure a company's size and helps investors diversify their investments across companies of different sizes and different levels of risk.
Market value of equity is calculated by multiplying the number of shares outstanding by the current share price . For example, if the share price is $10 and the total number of shares outstanding is 1 billion, the market value of equity is $10 multiplied by 1 billion, or $10 billion.
Market Value Vs. Book Value
The market value of equity is different from the book value of equity. The book value of equity is based on stockholders' equity, which is a line item on the company's balance sheet . It is the difference between a company's assets and liabilities. By contrast, market value is based on stock price. Banks generally don't lend money based on stock price. The market value of equity does not describe a company's capital resources, but it does help to describe the company's size and evolution. Each level of capitalization provides insights about the company's market profile.
In general, there are three different levels of market capitalization, and each level has its own profile. Companies with a market capitalization of less than $2 billion are considered small capitalization, or small caps. Companies with a market capitalization of between $2 billion and $10 billion are considered medium capitalization stocks, also referred to as mid-caps. Companies with a market capitalization over $10 billion are considered large capitalization, or large caps.
Each level has a profile that can help investors gain insights about the behavior of the company. Small caps are generally young companies in the growth stage of development. They are risky, but have higher growth potential. Large caps are mature companies; they may not offer the same growth potential, but they can offer stability. Mid-caps offer a hybrid of the two. By owning stocks in each category, investors ensure a certain amount of diversification in assets, sales, maturity, management, growth rate, growth prospects and market depth.