How to Calculate Market Capitalisation Using Shares Outstanding with Example
Understanding the difference between market capitalisation and shares outstanding is vital for Commerce students. These concepts are regularly tested in school exams, competitive entrance tests, and are important for building fundamental knowledge of how businesses are valued in the real world. This clear explanation will help students grasp definitions, calculation methods, and practical applications with examples and tables for easy revision.
| Aspect | Market Capitalisation | Shares Outstanding |
|---|---|---|
| Definition | Total value of a company’s outstanding shares in the stock market. | Total number of shares currently held by investors. |
| Formula | Market Cap = Share Price × Shares Outstanding | Sum of all shares issued minus treasury shares and buybacks |
| Purpose | Measures company size and market value. | Shows ownership distribution in the company. |
| Changes Due To | Stock price changes and changes in shares outstanding. | Issuance of new shares, buybacks, splits, or conversions. |
| Key Use | Investment decisions, company comparison, IPO pricing. | Calculating market cap, voting rights, EPS calculation. |
Difference Between Market Capitalisation and Shares Outstanding
Market capitalisation is the total monetary value of a company’s shares in the stock market, found by multiplying the current share price by the number of shares outstanding. Shares outstanding refer to the total number of company shares held by investors at a given time.
| Market Capitalisation | Shares Outstanding |
|---|---|
| Shows the market value of the company. | Shows the quantity of company ownership units. |
| Changes every day with stock price movements. | Changes with share issuing, buybacks, splits. |
| Key metric for investors and analysts. | Used to calculate market cap, EPS, voting strength. |
Market Capitalisation Meaning
Market capitalisation, or market cap, is a measure of a company’s total value in the stock market. It is calculated using the share price and the total number of shares outstanding. Market cap helps investors assess the relative size of companies for stock market analysis and investing.
Shares Outstanding Explained
Shares outstanding is the total number of shares a company has issued that are currently held by all shareholders, including institutions and individuals. This number changes with stock splits, buybacks, or new share issues. It does not include shares held by the company itself (treasury shares).
Calculation Methods and Example
To calculate market capitalisation, multiply the current market price of one share by the total shares outstanding. Shares outstanding are typically obtained from a company’s balance sheet or stock exchange data.
Example Calculation:
If a company has 20,00,000 shares outstanding, and each share trades at ₹80:
- Market Capitalisation = 20,00,000 × ₹80 = ₹16,00,00,000
If the company issues 1,00,000 new shares, shares outstanding become 21,00,000, so the market cap will also change if the share price stays the same.
Key Differences Between Market Cap and Shares Outstanding
Shares outstanding is a count of the company’s shares currently owned by all shareholders. Market capitalisation tells us the company’s financial worth, using the current price and total shares outstanding. While shares outstanding change mainly due to company actions, market cap changes daily with share price.
Inter-relationship and Practical Uses
Market capitalisation and shares outstanding are linked because market cap is directly calculated using the number of shares outstanding. Both terms are important in financial statements, IPO pricing, investment analysis, and for calculating ratios such as Earnings Per Share (EPS) and Price-to-Earnings (P/E) ratio. At Vedantu, we simplify these concepts so students can apply them confidently in exams and business decisions.
Real-World Example
Suppose two companies, X and Y, have the same share price of ₹100. Company X has 5,00,000 shares outstanding, and Company Y has 20,00,000. Their market values:
- X: 5,00,000 × ₹100 = ₹5,00,00,000
- Y: 20,00,000 × ₹100 = ₹20,00,00,000
Even though both share prices are equal, Company Y is four times larger in value. This shows the practical use of market cap versus relying only on share price.
Common Misconceptions and Additional Examples
A common mistake is to think a low share price means a company is ‘small’. In reality, the company size depends on the number of shares outstanding as well as the price. Companies can also do stock splits or buybacks, affecting shares outstanding and thus the market capitalisation. Students should always check both metrics while preparing for commerce exams or making business decisions.
Page Summary
The difference between market capitalisation and shares outstanding is central to understanding company valuation and ownership. Market capitalisation uses the share price and shares outstanding to find company value, while shares outstanding shows ownership units. Mastery of these concepts prepares students for exams, finance careers, and investment knowledge.
FAQs on Difference Between Market Capitalisation and Shares Outstanding
1. What is the difference between market capitalisation and shares outstanding?
Market capitalisation reflects a company's total value, while shares outstanding represent the total number of shares held by investors. Market cap is calculated by multiplying the share price by the number of shares outstanding. Understanding the difference is crucial for financial analysis and investment decisions.
2. What is market capitalization?
Market capitalization (market cap) represents the total market value of a company's outstanding shares. It's calculated by multiplying the current market price per share by the total number of outstanding shares. This metric is a key indicator of a company's size and value in the stock market. Understanding market cap is essential for investors and financial analysts.
3. What are shares outstanding?
Shares outstanding refer to the total number of a company's shares that are currently held by all its shareholders, including institutional investors, individual investors, and company insiders. This figure excludes treasury stock (shares the company holds itself). Knowing the number of shares outstanding is vital for calculating key financial metrics like market capitalization.
4. How do you calculate market capitalization?
Market capitalization is calculated using a simple formula: Market Cap = Current Market Price per Share x Number of Shares Outstanding. For example, if a company's share price is $50 and it has 10 million shares outstanding, its market cap would be $500 million. This calculation is fundamental in understanding a company's valuation.
5. What is the difference between market Capitalisation and share capital?
Market capitalization is a company's total market value based on its current share price, while share capital is the total amount of money raised by issuing shares during the company's formation and subsequent offerings. Market cap fluctuates daily with share prices, whereas share capital is a static figure reflecting historical investments.
6. Is share capital the same as shares outstanding?
No, share capital represents the total amount of money invested in the company by shareholders, while shares outstanding is the total number of shares currently held by investors. Share capital may include both issued and unissued shares, whereas shares outstanding only counts the shares currently in the hands of investors.
7. What is the difference between outstanding shares and capital stock?
Outstanding shares represent the shares currently held by investors, while capital stock refers to the authorized number of shares a company can issue. Capital stock is a static figure in a company's charter, whereas outstanding shares change over time due to stock issuances, buybacks, and other corporate actions.
8. How to calculate market cap without shares outstanding?
You cannot directly calculate market capitalization without knowing the number of shares outstanding. The formula requires both the share price and the number of outstanding shares. This information is publicly available for publicly traded companies.
9. Why is market cap more useful than share price?
While share price indicates the cost of a single share, market capitalization provides a broader measure of a company's overall worth and scale. Comparing the market cap of different companies allows for a more accurate comparison of their size and value, regardless of the number of shares issued.
10. Can market cap change daily?
Yes, market capitalization changes daily as the share price fluctuates. Since market cap is directly dependent on the share price, any change in the stock's price will immediately impact the company's market capitalization.
11. How do corporate actions like buybacks impact shares outstanding and market capitalisation?
Share buybacks reduce the number of shares outstanding, potentially increasing the market capitalization (if share price remains unchanged). This is because the same market value is spread across fewer shares, increasing the value per share. However, the total market value might not increase immediately.
12. What is the practical importance of market capitalisation for IPO investors in India?
Market capitalization is a key indicator for IPO (Initial Public Offering) investors in India. It helps assess the company's size and value relative to other companies in the market. A higher market cap generally signifies greater market confidence and potential for future growth.
13. Do all issued shares count as outstanding shares for market cap calculations?
No, only issued shares that are held by investors count toward shares outstanding in market capitalization calculations. Shares held by the company itself (treasury stock) are excluded.
14. How do bonus issues or stock splits affect these values?
Bonus issues and stock splits increase the number of shares outstanding but do not directly change the total market capitalization. The market value is spread across more shares, leading to a lower price per share, while the overall valuation remains largely the same.
15. Can market cap reflect actual company value in case of volatile stock markets?
In volatile markets, market capitalization may not accurately reflect a company's true intrinsic value. Short-term market fluctuations can significantly impact share prices, leading to temporary discrepancies between market cap and the underlying value of the company's assets and future earnings.
