Market Capitalization vs. Market Value: An Overview

In many areas of the financial sector, including economics, accounting, and investing, accurately assessing the value of a company can be of utmost importance. There are numerous ways to measure company size and value, and confusion naturally arises, especially with similar-sounding terms.

Two such misleading terms are market capitalization and market value. While each is a measure of corporate assets, the two are vastly different in their calculation and precision.

Market Capitalization

Market capitalization colloquially referred to as "market cap," is a very simple metric based on stock price. To calculate a company's market cap, simply multiply the number of shares outstanding by the current price of a single share.

For example, a company with 50 million shares and a stock price of $100 per share would have a market cap of $5 billion. Market capitalization is often used to help define company "value" when analyzing potential trade opportunities.

However, stock prices themselves are highly subjective in many instances; they don't follow any mathematical formula for definitively valuing a stock. Different factors are weighted in vastly different ways, which means that even market capitalization is still a somewhat subjective measure of value.

Market Value

While market cap is often referred to as the value of a company, or what a company is "worth," a company's true market value is infinitely more complex. Market value is assessed using numerous metrics and multiples, such as price-to-earnings, price-to-sales, and return-on-equity. These different metrics take into account several factors in addition to stockholder equity, such as outstanding bonds, long-term growth potential, corporate debt, taxes, and interest payments.

[Important: Market value can fluctuate greatly over time and is heavily affected by business cycles; market values plunge during the bear markets that accompany recessions and rise during the bull markets that happen during economic expansions.]

Market value is also dependent on numerous other factors, such as the sector in which the company operates, its profitability, debt load, and the broad market environment. For example, Company X and Company B may both have $100 million in annual sales, but if X is a fast-growing technology firm while B is a stodgy retailer, X’s market value will generally be significantly higher than that of Company B.

Key Differences

Confusion between market cap and market value stems from the fact that market capitalization is essentially a synonym for the market value of equity. However, these concepts are simple calculations based on assets only.

For example, while software giant Apple (AAPL) had a market capitalization of $741.37 billion toward the end of 2018, its market value was $789.56 billion. In a more striking example of the difference between these two metrics, mega-retailer Walmart (WMT) has a market capitalization of $267.66 billion, but a market value of $354.21 billion.

Key Takeaways

  • While market capitalization and market value are both measures of corporate assets, the two are vastly different in their calculation and precision.
  • Market capitalization is calculated by multiplying the number of shares outstanding by the current price of a single share.
  • Market value is assessed using numerous metrics and multiples, including price-to-earnings, price-to-sales, and return-on-equity.