Last year, in our Account And Security Types series, we discussed a variety of different types of investment accounts and securities, including stocks. Now, we will be starting a new series covering stocks, and their related concepts and terminology, in more depth.
This first post will be about market capitalization.
What is a stock?
As a review, stock is ownership interest in a company – if an investor owns stock in a company, they are a co-owner. The ownership interest is divided into different units called “shares” A shareholder is (typically) able to:
Vote of certain items of company business.
Vote to elect members of the board of directors.
Receive dividends, which are a portion of the company’s earnings (at the discretion of the board of directors).
In my experience, many people either do not understand or forget this simple fact that a stock is ownership interest in a company. Stocks are often thought of as separate from the performance of the underlying companies. There is a lot of volatility and drama around the stock market that (to some extent) make it understandable that people treat it more like a casino than a place where you make the business decision of buying and selling small pieces of companies. Regardless, I just want to emphasize this fundamental – that stock is ownership interest in a company – before we proceed in this series.
This series will cover stocks and their concepts and terminology
As described above, it is very important to remember that a stock is ownership interest in a company. With this is mind, there are a number of different concepts, terminology, and metrics that can be used to describe how the business is doing, how expensive or cheap the company’s shares are selling for, etc.
Although many of the terms are related, there is not necessarily an ideal order in which to go through them. Regardless, when possible, each topic will be explained and related to the previously discussed topics.
What is market capitalization?
When looking at a company, a natural first question is, “what is the value of the company?” It is tempting to look at the price per share and try to use that to measure the company’s value. For example, some may think that a company with a price per share of $1,000 is worth more than a company with a price per share of $50. However, this does not take into account that the first company may only have 100 total shares and the second company may have 1,000,000 total shares.
Multiplying the number of shares outstanding by the price per share results in the value of all shares, which is called market capitalization (or “market cap”). For example, if a company has 1,000 shares outstanding and the price per share is $80, the market capitalization of the company would be $80,000 (1,000 * 80). Market capitalization is the value of all equity ownership in a company.
Market cap is one of the first metrics listed when looking up a quote for a company’s stock. Here are a two examples of different finance websites (CNBC.com and Google Finance) and their metrics for CocaCola (symbol = KO):
As you can see, the market capitalization of CocaCola is about $275.6 billion. This is the value the total number of shares multiplied by the price per share.
If you have any comments, questions, or ideas for future posts, please let me know
I hope you found this post helpful and educational. If you have any comments, questions, or ideas for future posts, please let me know. You can reach me directly via email at crawford@ulmerfinancial.com.
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