Lesson 02 of 04
Price is not the size of the company
Market capitalization is price times shares. That product is the market’s price tag for the equity, and only the equity.
Keep these
- Market cap = price per share × shares outstanding.
- Comparing prices across companies, without the share count, is a category error.
- Market cap ignores the debt and cash that change what the whole business is worth.
The lesson
Imagine two firms that the market values at the same total. One has ten shares. The other has a thousand. The second share price looks “cheap” only because the pie was cut thinner. Market capitalization puts the pie back together.
That total is still only the equity. A company can owe a great deal, or sit on a pile of cash that is not needed to run the business. Later lessons separate the value of the operations from the value of the shares. For now, refuse the sentence “it is only a dollar, so it is cheap.”
Market cap is also a market price, with all the noise that implies. A large number is not a certificate of quality. A small number is not a bargain. Both are the current product of price and share count.