====== Market Value of Equity (Market Cap) ======
Market Value of Equity (also known as [[Market Capitalization]] or, more commonly, 'Market Cap') is the total value the stock market places on a company's shares. Think of it as the company's stock market price tag. You calculate it with a beautifully simple formula: the current [[Share Price]] multiplied by the total number of [[Shares Outstanding]]. For example, if a company has 10 million shares trading at $50 each, its Market Cap is $500 million. This figure represents the market's collective, real-time "opinion" on the value of the business's [[equity]] portion. It's a dynamic number, dancing up and down with every tick of the stock price. Crucially, this is //not// the same as [[Book Value of Equity]], which is an accounting figure based on historical costs. Market Cap is what investors are willing to pay for the company's future, right now, warts and all.
===== How to Calculate It =====
Figuring out a company's Market Cap is one of the easiest calculations in finance. You don't need a supercomputer, just two pieces of information:
  * **Current Share Price:** The price of a single share, which you can find on any financial news website.
  * **Shares Outstanding:** The total number of shares the company has issued. This is publicly available in the company's financial filings, like the annual [[10-K]] or quarterly [[10-Q]] reports.
The formula is simply:
**Market Cap = Current Share Price x Shares Outstanding**
Let’s say you’re looking at //WhizBang Gadgets Inc.//. Its stock is trading at $20 per share, and it has 50 million shares outstanding.
**Market Cap of WhizBang = $20 x 50,000,000 = $1,000,000,000**
Voila! WhizBang Gadgets has a market capitalization of $1 billion. This means you’d need $1 billion to buy every single one of its shares at today's price.
===== Why It Matters to a Value Investor =====
For a value investor, Market Cap is the starting gun, not the finish line. It tells you the **price** of a business, but it says almost nothing about its **value**. This distinction is everything.
==== The Market's "Opinion" vs. Reality ====
The Market Cap is the daily poll of [[Benjamin Graham]]'s famous "Mr. Market"—an emotional, manic-depressive business partner. Some days he's euphoric and will offer to buy your shares at a ridiculously high price; other days he's despondent and will offer to sell you his shares for pennies on the dollar. The Market Cap is his quote of the day. A value investor's job is to ignore the mood swings and calculate a company's sober, long-term [[Intrinsic Value]]. The goal is to buy when Mr. Market is pessimistic, meaning the Market Cap is significantly //below// your estimate of Intrinsic Value. This gap is the famous [[Margin of Safety]].
==== A Starting Point, Not the Destination ====
A huge Market Cap doesn't automatically make a company a great investment, and a tiny one doesn't make it a bargain. It's just a measure of size. A $500 billion company could be wildly overpriced, while a $500 million company could be the deal of a lifetime. The Market Cap is a critical piece of the puzzle, but it doesn't show you the whole picture. For instance, it //doesn't// tell you:
  * **How much debt the company has.** A company could have a low market cap but be drowning in debt.
  * **How profitable the business is.** Many companies with huge market caps have never turned a profit.
  * **The quality of the business.** It says nothing about its management team, brand strength, or [[Competitive Moat]].
===== Market Cap vs. Enterprise Value =====
This is a common point of confusion, so let's clear it up with an analogy.
Imagine you want to buy a house. The **Market Cap** is like the agreed-upon price for the house itself—the homeowner's equity. If the house is listed for $500,000, that’s its "market cap."
But what if the house has a $300,000 mortgage on it? And what if you find $10,000 in cash stashed under the floorboards? To truly "own" the whole thing, you'd have to pay the $500,000 //and// assume the $300,000 mortgage. But you get to keep the $10,000 cash.
This total cost is the [[Enterprise Value]] (EV).
**EV = Market Cap + Total Debt - Cash**
In our example: **EV = $500,000 + $300,000 - $10,000 = $790,000**
Enterprise Value gives you the theoretical takeover price of a business. It’s a more complete picture because it accounts for both debt (which a buyer must assume) and cash (which a buyer gets to keep). This is why many professional valuation ratios, like [[EV/EBITDA]], use Enterprise Value instead of Market Cap to get a more accurate, apples-to-apples comparison between companies.