Can Someone Explain Market Cap VS Valuation?

paul7g

Everywhere I read it says Market Cap is the amount of outstanding shares, which I find confusing.

Can someone explain the difference between both to a simpleton like me, thanks

jimmii

Market cap is what the value of the shares is a valuation is really just what someone thinks the company is worth or is willing to pay. For example the market cap of Manchester United is a lot lower than the likely valuation the Glazers have of it.

paul7g

jimmii wrote: »

Market cap is what the value of the shares is a valuation is really just what someone thinks the company is worth or is willing to pay. For example the market cap of Manchester United is a lot lower than the likely valuation the Glazers have of it.

Thanks. So basically if there are 100 shares, each worth €1,000, the market cap is €100,000?

Sorry, a few more questions:

1. Is the price of a share determined by how much someone is willing to pay for a share?

2. What is the difference in a company having 100 x shares worth €1,000 VS another company having 1000 shares worth €100?

3. Google shares might be €2,300 but surely that depends on how many shares there is?

4. What does a company use to determine how many shares they go with? 100 vs 10,000?

jimmii

paul7g wrote: »

Thanks. So basically if there are 100 shares, each worth €1,000, the market cap is €100,000?

Sorry, a few more questions:

1. Is the price of a share determined by how much someone is willing to pay for a share?

2. What is the difference in a company having 100 x shares worth €1,000 VS another company having 1000 shares worth €100?

3. Google shares might be €2,300 but surely that depends on how many shares there is?

4. What does a company use to determine how many shares they go with? 100 vs 10,000?

1) Essentially yes. There's all sorts of ways to measure the value of a company around profit, potential, background etc but in the end it comes down to opinions still really thats why you see some popular companies attract huge market caps with little to base it on and some companies share price stay low just because they're not as cool.

2) Nothing really. Historically there was a preference for lower priced shares so you could own a whole share but these days dealings aren't really down in while shares. You do still gets companies changing as the grow though for example Tesla split there shares last year so if you owned one share after the split you owned 5 shares they were each worth 1/5th of what they were previously so the total value of your investment is the same but you now own 5 times as many shares. Over the years Apple have split there stock five times it keeps the price sensible if they hadn't their shares would be $30k+ each.

3) yeah the value of the shares really have little bearing on the value of the company. A company whose shares trade at $1 could be worth many times the value of a company with shares trading at $1000.

4) each company can set as many as they want originally in my company I think we set it at 1000 so it was easy to sell portions of if need be. You can change the number of shares by vote if need be. If you only issue a few number of shares then you obviously have a fewer number of shareholders to deal with but some companies will want to make their shares as widely available to everyone and set a nice low price to attract more interest. If you want to see a mad individual share price check out Berkshire hathaway! There's probably some "prestige" in having a high individual share price like that.

paul7g

Thanks Jimmii.

Last question, I promise :-)

If a company has 1000 shares at €1,000 a share, the market cap is €1,000,000

So if a company has a €1m market cap, that is it’s value? Yet the valuation of the company is usually very different?

- Market Cap Value
- Valuation

What is the price the company can realistically get in terms of a sale?

jimmii

paul7g wrote: »

Thanks Jimmii.

Last question, I promise :-)

If a company has 1000 shares at €1,000 a share, the market cap is €1,000,000

So if a company has a €1m market cap, that is it’s value? Yet the valuation of the company is usually very different?

- Market Cap Value
- Valuation

What is the price the company can realistically get in terms of a sale?

The sale price would depend on the value of the company to the buyer and the value of the company to the seller. The buying company could be picking up a company where there would be huge cost savings from the two combining in that sort of situation two companies worth x could combine to be worth 3x if there is a lot of overlap in that sort of situation then the company would naturally be willing to pay markedly over the market cap to secure the company. Theres no way to say exactly what a sale price would be as there are lots of variables.

garrettod

Hi,

Just to add to the above, there's a few ways to value a company, including :

* For quoted companies, there's the market value (as discussed above).

* There's the net worth of the company, per the most recent Balance Sheet.

* There's the enterprise (or going concern) value - which is typically a multiple of lasy year's adjusted earnings. The multiple will differ from one industry to the next, deepening on what prospects the company is believed to have etc.

* There's the break up value of the company, which will usually be less than the net worth per Balance Sheet, and reflect what the liquidation of the business is likely to generate.

Suffice to say, a buyer and a seller will have different agendas, so will most likely want to try and use different methods of calculation. A bank will have an even more conservative approach, when valuing the company as security for a loan.

Darc19

Bitcoin has a market cap of 1.1 Trillion Dollars

It has a valuation of 0

paul7g

Great, thanks for the help, it’s much appreciated.

CIARAN_BOYLE

In general the price on the market is set by a small portion of shares that actively trade.

To buy the company you need to convince the majority to sell to you including the people who have owned shares for 50 years.

The market price is the price I could find a share to buy today. That's because a shareholder is willing to sell at that price.