What is Market Capitalization Formula?
Market Capitalization formula calculates the total equity value of the company and found by multiplying the current market price per share of the company with the total number of outstanding shares.
To use Market Cap formula, you need to know two things about the company and its stocks:
- At first, we have to know how much the company’s current share’s selling price on the stock market. The price is not constant and will vary every day and sometimes several times a day. We can get the value from the money control website.
- Secondly, we need to know the number of shares outstanding in the market. The number of shares will vary from company to company. Some large companies sometimes split their shares to increase the number of shares. Therefore the price of each share decreases due to the increase in the number of shares.
Then we calculate the market cap formula by multiplying the current share price by the number of outstanding shares.
Examples of Market Capitalization Formula (with Excel Template)
Let’s see some simple to advanced examples of Market cap formula to understand it better.
Example #1
A Company ABC has a total of 20,000,000 shares outstanding and lets us suppose the current share price is $ 12.
Based on the above-given information and the formula of Market Cap, we will be able to calculate that ABC Company’s market capitalization.
- Market Capitalization Formula = 20,000,000 x $ 12 = $ 12 million.
We must also remember that not all shares trade in an open market. The shares which are available in the open market is called float.
Example #2
Let’s see an example of Kirloskar Oil Engines Limited for the calculation of the market cap.
#1 – First, we will find out the current stock price of the company from the Money control site.
Source – https://www.moneycontrol.com/
So we see the current price is 179.00 (BSE) as of date 29th Jan’19.
- Current Price=179.00
#2 – Secondly we need to know the number of shares that are selling on the stock market. We can get that from the balance sheet of the company from the Money control site.
In Money control website we easily calculate the total outstanding shares as they divide the share capital into Equity share capital and Preference share capital. We can find both under the share capital in Money control.
Now we will find out the total outstanding shares of Kirloskar Oil Engines Limited. If the company has issued only equity shares then we can calculate outstanding shares by simply dividing share capital by its face value.
The share capital is Rs 28.92 Cr as in the fig below as of March’18.
Source- https://www.moneycontrol.com/
The face value can be also taken from Moneycontrol website.
Source – https://www.moneycontrol.com/
The face value is Rs 2.
Therefore we can calculate outstanding shares as
- Outstanding shares = 28.92/2
- = 14.46
Therefore, from the above, we have gathered the following information for the calculation of Market Cap.
So, the calculation of Market Cap will be as follows –
- Market Capitalization Formula = 14.46*192.95
Market Capitalization will be-
- = Rs 2588.3400 Cr
Example #3
Let’s see an example of ITC Ltd for the calculation of the market cap.
#1 – First, we will find out the current stock price of the company from money control (BSE).
Source: https://www.moneycontrol.com/
So we see the current price is Rs 275.95 as of date 29th Jan’19.
- Current Price = Rs. 275.95
#2 – Secondly we need to know the number of shares that are selling on the stock market. We can get that from the balance sheet of the company from the Money control site.
In Money control website we easily calculate the total outstanding shares as they divide the share capital into Equity share capital and Preference share capital. We can find both under the share capital in Money control.
Now we will find out the total outstanding shares of ITC Ltd. If the company has issued only equity shares then we can calculate outstanding shares by simply dividing share capital by its face value.
The share capital is Rs 1,220.43 Cr as in the fig below as of March’18.
Source- https://www.moneycontrol.com/
The face value can be also taken from Moneycontrol website.
Source: https://www.moneycontrol.com/
Therefore, the face value is Rs 1.
Therefore we can calculate outstanding shares as
- Outstanding shares = 1220.43/1
- = 1220.43
Therefore, from the above, we have gathered the following information for the calculation of Market Cap.
So, the calculation of Market Cap will be as follows –
- Market Capitalization Formula= 1220.43*275.95
Market Capitalization will be-
- = Rs 336777.659 Cr.
Relevance and Use
Market capitalization Formula is the main component when we want to assess a stock because we can calculate the value of the company from it. Market capitalization formula gives us the total value of the company.
Market capitalization Formula allows us to compare companies of a similar industry. The market divides the stock into three main categories.
- Small Cap– Small-cap companies are usually start-ups companies which are currently in the development stage. As for the investors, these usually have small to high-risk investments.
- Mid Cap– Investments in mid-cap companies are usually less risky than the small-cap ones. They have a tremendous scope of growth and can return a good investment in 3-5 years’ time.
- Large Cap– Large Cap stocks usually have a safe return as the companies have a good market presence.
Therefore market cap formula helps the investors to understand the returns and risks in the share and also helps them to choose their stock wisely which fulfills their criteria of risk and diversification.
We must also remember that market cap formula only reflects the equity value of a company. The enterprise value of the company is a better method as it reflects debt, preferred stock.
Recommended Articles
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