Definition of market capitalization
Market capitalization is the market value of all the shares of a company. In theory, therefore, this is the price to pay to acquire the company. Market capitalization includes all of the company’s outstanding securities held by shareholders .
Calculation of market capitalization?
Market capitalization is calculated using the following formula: Total number of shares * share price on the stock market.
Market capitalization changes continuously during the opening hours of the market on which it is listed. It is a function of the evolution of supply and demand for the company’s shares . The higher the demand, the more the increases. On the other hand, if there are more sellers than buyers (taking profits or selling the security), the market capitalization decreases.
If the market capitalization is on the rise overall, it is because the image of the company with investors is good. Conversely, a declining market capitalization is the sign of
real value of the company?
There are several methods to assess the real value of a company and they are all based on the study of the company’s accounts (balance sheet, income statement …). The real value of a company is given by a thorough financial analysis and therefore does not correspond to the market capitalization in any way.
If an acquirer wants to buy the business, they do not pay the amount of market capitalization. It pays the real value of the business. If he makes an offer on the company, it is because he believes that the real value is greater than the market capitalization. The purchaser can therefore afford to offer an acquisition premium to take possession of the company.
Market capitalization is only one way to gauge how the market perceives the company. This perception can be overvalued if the market capitalization is greater than the true value of the company or undervalued otherwise.