Table of contents
Introduction
It was the year 1602 when the modern stock market originated with the establishment of the East India Company. Since then, the stock market has evolved, and many financial terms have come into the picture.
Being proficient in these basic financial terminologies and concepts is essential to becoming a successful investor. When considering equity markets, the two most commonly heard terms are market capitalization and equity.
Are these two terms synonymous, or are they different in reality? If you are still trying to figure out the answer, check out this blog on market capitalization vs equity for deeper insights!
What is market capitalization?
Market capitalization or market cap is the total value of a company’s stocks in the market and is calculated by multiplying the number of outstanding shares that the company has and the stock price.
For example, if a company has 10,000 outstanding shares, each stock is priced at Rs. 500, the total market cap of that company would be Rs. 50,00,000. Market cap helps investors categorise the relative size of a business compared to others and rank them based on their sizes.
One important thing you should note is that the market cap does not measure the company’s equity value. Wait, what does that even mean? Well, in simpler terms, the market cap is a function of the stock price; hence, when the stock price fluctuates, the market cap will also fluctuate.
These stocks can sometimes be undervalued or overvalued; therefore, the cost of acquiring the company is not always equal to the market cap of the company.
Types of market capitalization
The stock market can be divided into different categories based on their market cap, and below, we have listed the three essential categories.
- Large-cap companies
If a company’s total market cap lies above Rs. 20,000 crores, the company can be classified as a large-cap company.
Investing in these companies is said to be less risky; however, since most of these companies are at the pinnacle of their growth, the returns obtained might be lower. According to SEBI’s guidelines, the top 100 companies are placed in this category.
- Mid-cap companies
If a company’s market cap lies between Rs. 5000 crores and Rs. 20000 crores, it is classified as a mid-cap company. Generally, these companies have had a certain growth and are slightly stable.
However, these companies still have a lot of untapped or tapped growth potential. Therefore, the risks and rewards of investing in these stocks can range from low to high.
Companies whose market cap is below Rs. 5000 crores are known as small-cap companies. These companies have a long way to go before they get established in the market and are still in the growth stage.
Investing in these companies is the riskiest of all because one failure can diminish your capital. At the same time, their success can mean that your capital’s value will skyrocket!
What is equity?
Equity is the true value of your stake or ownership interest in a company. Equity is a much better metric for estimating the company’s actual value. It also does not fluctuate heavily because it is not directly dependent on the stock price.
To break it down into simple terms, equity is the value remaining after a company liquidates all its assets and pays off all its debts. Therefore, equity is calculated by subtracting the total liabilities from the total assets.
Equities or stocks are sold in the equity market, also known as the stock market. It is important to remember that sometimes when talking about the equity market vs capital market, people often assume they are the same.
However, equity markets only deal in equity or stocks, while capital markets deal with both equity and debt instruments.
Components of equity
When a company prepares a balance sheet, equity is represented by a few components, which we have listed below.
- Share capital
Share capital represents the value of the shares that the company issues to its shareholders, and it is also the total amount of money that the company raises after issuing these shares.
- Reserves and surpluses
Reserves are the profits retained over the years, while surpluses represent the excess of income over the expenditure. These funds are usually reserved for contingencies as well as expansion and growth plans.
Market capitalization vs equity value: Key differences
In most cases, when you compare market capitalization vs market value of equity, you will discover that the market cap is always greater than the company’s equity value. This is because investors often consider factors such as a company’s projected growth and ability to generate profits. Both of these key parameters can be easily found in a company’s annual report.
Now, it is time to look at key aspects that differentiate market cap and equity.
| Aspect | Market Cap | Equity |
| Definition | The total valuation or value of a company’s shares in the market. | Ownership interest or stake of a shareholder in the company. |
| Formula | Market Cap = Number of outstanding shares × The stock price | Equity = Total assets – Total liabilities |
| Stock price impact | Fluctuates based on the stock price daily | Not affected by stock price changes and is relatively stable over time |
| Usage | Used to estimate a company’s size and its valuation | Used to measure a company’s financial health and performance in the market |
| Impact of market sentiment | Prone to even short-term market sentiments and hence is volatile | Resistant to short-term market sentiments and is stable |
Conclusion
Market capitalization and equity are pivotal parameters that help investors gauge a company’s financial position and its value in the market. By accounting for these parameters during your evaluation, you can ensure that you make informed decisions and gain a more holistic perspective of the market.
Lastly, always remember that the market cap and equity value are usually different. Remember to research as much as possible about a company before you start your investment journey! To know more, subscribe to StockGro!
FAQs
When performing a market capitalization vs equity analysis, people often assume they are usually the same. However, they are different, and only the market cap is heavily affected by stock price, while equity value remains stable even with price fluctuations.
Knowing these parameters helps you determine the potential rewards and risks associated with investing in a company and thus supports you in making data-driven and informed decisions.
Market cap reflects investors’ sentiments, projected future earnings, and growth potential, while equity value is based on both tangible and intangible factors such as brand image and market perception. Therefore, both these parameters differ in value in most cases.
Yes, the equity value can exceed the market cap when the company has a large number of assets with negligible debts. If this is combined with the stock being undervalued in the market, equity value can be higher.
Market cap value depends on the stock price; therefore, if the price is volatile, the market value will also fluctuate heavily. On the other hand, equity value is stable, and it does not depend on stock price.