Market Capitalization vs. Market Value: What's the Difference?

Market Capitalization vs. Market Value: An Overview

Market capitalization is the number of a company's shares outstanding multiplied by the current price per single share. Market value is more complicated. It's assessed using numerous metrics and multiples including price-to-earnings, price-to-sales, and return-on-equity.

Accurately assessing the value of a company can be of utmost importance in many areas of the financial sector, including economics, accounting, and investing. Company sizes and values can be measured in numerous ways and there's often confusion concerning similar-sounding terms.

That's the case with market capitalization and market value. Each is a measure of corporate assets but the two are vastly different in their calculation and precision.

Market Capitalization

Market capitalization or "market cap" is a simple metric based on stock price. You can calculate a company's market cap by multiplying the number of its shares outstanding by the current price of a single share. A company with 50 million shares and a stock price of $100 per share would
have a market cap of $5 billion.

Market capitalization is often used to help define the value of a company when analyzing potential trade opportunities but stock prices themselves are highly subjective in many cases. The price of a stock doesn't follow any mathematical formula in its movements, although day traders are always trying to come up with money-making equations.

Different factors are weighed in the price in vastly different ways so even market capitalization can be a somewhat subjective measure of value.

Market Value

Market cap is often referred to as the value of a company or what a company is worth but a company's true market value is infinitely more complex.

Market value is determined by valuations or multiples accorded by investors to companies, such as price-to-sales, price-to-earnings, and enterprise value-to-EBITDA. These metrics take several factors into account in addition to stockholder equity.

Factors include outstanding bonds, long-term growth potential, corporate debt, taxes, and interest payments. The higher the valuations, the greater the market value.

Market value can be dependent on numerous other factors, such as the sector in which a company operates, its profitability, its debt load, and the overall market environment. It also reflects investor or analyst opinion.

Company X and Company Y may both be technology companies with $100 million in annual sales but X’s market value will generally be significantly higher than that of Company Y if X is a fast-growing technology firm that's investing heavily in R&D. Investors will expect greater innovation and newer and better products from Company X.

Key Differences

The terms market capitalization and market value aren't confused just because they sound similar. People often use the two interchangeably. They refer to a company's market cap as its "market value," as its "stock market value," or as its "value in the marketplace."

But they're referring to a specific type of market value when they do this. Market capitalization is essentially a synonym for the market value of equity.

A company's market cap is a single incontrovertible figure because it's the number of outstanding shares multiplied by the price of a share. Market valuations can vary depending on the exact metrics and multiples that an analyst uses.

The Bottom Line

Market capitalization and market value are both calculations based exclusively on corporate assets. Market capitalization is the number of a company's shares outstanding multiplied by the current price of a single share. Market value is more complicated because it uses numerous metrics and multiples in its calculation: price-to-earnings, price-to-sales, and return-on-equity.

Neither of these metrics should be confused with the book value of a company, which is its net worth. The book value is calculated by subtracting non-monetary assets and liabilities or debts from a company’s total assets. A company’s book value may be lower or higher than its market value or its market capitalization.