market capitalization
video transcript
In this video, we will use the example of the stock Bank of America, and will try and find out what market capitalization is, and how this ties into the market's thoughts on a company. Market capitalization, also known as market cap, is the market's thoughts of the total value of the issued shares in a public company, or known as the owner's equity. This number is simply calculated by multiplying the share price by the issued shares. In the example of Bank of America, the share price is 14.74 dollars exactly and we multiply that by the issued shares, which in the case of Bank of America is about 10.52 billion shares. As we do the math on a piece of paper, or on a calculator we get approximately 155 billion dollars as the market cap of Bank of America. Now, as we head over to the summary of the stock, we see the market cap that has been calculated by a third party is almost identical to our figure, the actual figure is 154.79 billion dollars. Now, this is the market's valuation of the owner's equity of Bank of America. But, as we look into the owner's equity that was calculated by the company itself, it is a higher number of about 232 billion dollars. Now, as we look at the difference we see about 86 billion dollars. That's a huge difference. Now the question is, why are these values so different? This is because someone out there in the market doesn't believe that these numbers are true. Maybe they think that the company doesn't have good growth prospects, or maybe they may run into difficulty moving forward due to competition. Now, on the flip side, an investor who likes the stock might think, this stock looks cheap, maybe I should buy it. Let's say that there is a stock which has a market cap that is higher than its owner's equity. If this is the case, then there is usually some sort of intangible attached to the company. Intangibles are something that you can't quite place a cash value on. For example, with a company like Coca-Cola, the brand itself is worth a lot of money, just because it's Coca-Cola. Another example can be with Apple, it's customer service is exceptional, but again you can't place a cash value on this, it's an intangible. Hopefully, this video taught you a bit about the market cap of a company.