It's important for investors to understand how companies compare to one another in terms of size and value. While both market value and market capitalization are a measure of a company's standing, they vary in how they are calculated.
Market capitalization, also known as market cap, demonstrates the value that investors are placing on a company at a given point in time, as represented by the total dollar value of a company's outstanding shares of stock. Market capitalization can be calculated by multiplying a company's shares outstanding by the current market price of a single share.
If a company has 40 million shares outstanding and a share price of $100 per share, its market cap would be $4 billion. However, market capitalization can rise and fall based on share price. If our same company's stock drops to $90 per share, then its market capitalization would change to $3.6 billion. Meanwhile, if the stock rises to $110 per share, then the company's market capitalization would grow to $4.4 billion.
Market value is a measure of a company's monetary value based on a range of factors, including its supply of shares and investor demand for those shares. Market value is calculated based on a number of valuations, such as price-to-earnings ratio, return on equity, long-term growth potential, and company assets and liabilities.
A company's market value can go up and down over time and is often influenced by market and industry conditions as a whole. An individual company's market value might decline, for example, if the sector it's in takes a hit due to increased regulations or roadblocks that could thwart overall profitability.
It's also possible for two companies with similar assets and sales to have different respective market values. If both are technology companies and one is known for its groundbreaking research and development department, the company with the renowned R&D team might have a higher market value due to investor perception.
Market capitalization vs. market value
Market capitalization reflects the equity value of a company only; it does not necessarily reflect its true market value. Whereas market capitalization represents a single measure of what a company is worth, market value takes numerous factors into account to create a broader picture of a company's financial standing.
This article is part of The Motley Fool's Knowledge Center, which was created based on the collected wisdom of a fantastic community of investors. We'd love to hear your questions, thoughts, and opinions on the Knowledge Center in general or this page in particular. Your input will help us help the world invest, better! Email us at email@example.com. Thanks -- and Fool on!
Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.