Stock Market Capitalization To GDP Ratio

What is the 'Stock Market Capitalization To GDP Ratio'

The stock market capitalization to GDP ratio is a ratio used to determine whether an overall market is undervalued or overvalued. The ratio can be used to focus on specific markets, such as the U.S. market, or it can be applied to the world market depending on what values are used in the calculation.

Calculated as:

 

Stock Market Capitalization To GDP Ratio

BREAKING DOWN 'Stock Market Capitalization To GDP Ratio'

The result of this calculation is the percentage of GDP that represents stock market value. Typically, a result of greater than 100% is said to show that the market is overvalued, while a value of around 50%, which is near the historical average for the U.S. market, is said to show undervaluation. In recent years, however, determining what percentage level is accurate in showing undervaluation and overvaluation has been hotly debated.

In 2000, according to statistics at the World Bank the market cap to GDP ratio for the U.S. was 153%, a sign of an overvalued market. With the U.S. market falling sharply after the dotcom bubble burst, this ratio may have some predictive value in signaling peaks in the market. However, in 2003, the ratio was around 130%, which was still overvalued but the market went on to produce all-time highs over the next few years.

RELATED TERMS
  1. Overvalued

    A stock with a current price that is not justified by its earnings ...
  2. Ratio Analysis

    A ratio analysis is a quantitative analysis of information contained ...
  3. Book-To-Market Ratio

    A ratio used to find the value of a company by comparing the ...
  4. Current Ratio

    The current ratio is a liquidity ratio measuring a company's ...
  5. Undervalued

    A financial security or other type of investment that is selling ...
  6. Combined Ratio

    A measure of profitability used by an insurance company to indicate ...
Related Articles
  1. Markets

    How to Invest Your Excess Cash in Undervalued Securities

    Learn how even small investors can shoot for substantial capital gains by starting to invest their excess cash in undervalued securities.
  2. Investing

    Finding Solid Buy-And-Hold Stocks

    Find out how to look at the big picture - even when the market's short-term outlook is less than rosy.
  3. Trading

    The Price To Earnings Ratio Explained

    The price to earnings ratio is one of the most important ratios in investing. Find out how it is calculated, how it can be used and what it tells investors about a particular stock.
  4. Markets

    Analyze Investments Quickly With Ratios

    Make informed decisions about your investments with these easy equations.
  5. Investing

    PEG Ratio

    Learn more about how this ratio is used to determine a stock's value based on its earnings growth.
  6. Markets

    Wal-Mart's 5 Key Financial Ratios (WMT)

    Identify the five key financial ratios that fundamental analysts use to evaluate Wal-Mart's financial position and determine if its stock is a good buy.
  7. Trading

    How To Use The P/E Ratio And PEG To Tell A Stock's Future

    While the price-to-earnings ratio is commonly used for assessing stock prices, the price/earnings-to-growth ratio offers forecasting advantages that investors need to know.
  8. ETFs & Mutual Funds

    Should Investors Still Buy Index Mutual Funds at Current Stock Market Prices?

    Learn about some of the metrics used to determine relative market valuation and discover if stock index funds are appropriate in overvalued markets.
  9. Investing

    Efficiency Ratio

    There are many types of efficiency ratios, but all measure how well a company utilizes its resources to make a profit. Business managers use these ratios to determine how well they are operating ...
  10. Investing

    Real Estate: How the Bubble Will Pop

    This real estate bubble is much different from the last one. Understanding it is imperative if you plan on making any investments.
RELATED FAQS
  1. How can we find out whether stocks are overvalued or undervalued?

  2. What is considered a good PEG (price to earnings growth) ratio?

    Learn about the price/earnings to growth (PEG) ratio and understand what investors and market analysts consider a good ratio ... Read Answer >>
  3. Why has the price to sales ratio become a more popular metric than it was in the ...

    Explore the usage of the price to sales ratio (P/S), and learn why it has become a more popular equity valuation metric for ... Read Answer >>
  4. How exactly do I use the price to sales ratio to evaluate a stock?

    Learn the best way for investors and market analysts to make use of the price to sales ratio in evaluating a company's stock. Read Answer >>
  5. What role does ratio analysis play in valuing a company?

    Learn about the role of ratio analysis in determining company value, including some of the most common ratios used by modern ... Read Answer >>
  6. How do I use the PEG (price to earnings growth) ratio to determine whether a stock ...

    Using the PEG, or price/earnings to growth, ratio provides a better picture of a stock's valuation versus simply relying ... Read Answer >>
Hot Definitions
  1. Diversification

    A risk management technique that mixes a wide variety of investments within a portfolio. The rationale behind this technique ...
  2. European Union - EU

    A group of European countries that participates in the world economy as one economic unit and operates under one official ...
  3. Sell-Off

    The rapid selling of securities, such as stocks, bonds and commodities. The increase in supply leads to a decline in the ...
  4. Brazil, Russia, India And China - BRIC

    An acronym for the economies of Brazil, Russia, India and China combined. It has been speculated that by 2050 these four ...
  5. Brexit

    The Brexit, an abbreviation of "British exit" that mirrors the term Grexit, refers to the possibility of Britain's withdrawal ...
  6. Underweight

    1. A situation where a portfolio does not hold a sufficient amount of a particular security when compared to the security's ...
Trading Center