Difference between Market Capitalisation and Shares Outstanding

Market Capitalisation

Market capitalisation, also known as market cap, is defined as the monetary value which changes daily as the share price of a company fluctuates every day. Because the companies also vary in their size, the market capitalisation values are divided into several categories to help simplify the company valuation. The market capitalisation value is a very important metric for the stakeholders, and it helps them to estimate the actual market size of the firm. The market cap of a company also helps the management make important decisions related to its future.

While it may seem that a larger, more established company does present a better investment opportunity, many people in the finance industry also warn against underrating the small-cap stocks. Though newer, the smaller companies are much more likely to go under when compared to their giant counterparts; they also have exponentially greater room for growth. Getting in on a lower valuation with a successful small-cap stock is definitely a highly lucrative proposition. Conversely, the larger a company is, it does not necessarily result in a better investment. Large companies may also be saddled with debt, suffer from limited growth prospects and have a multitude of other issues which come from operating on a larger scale.

Shares Outstanding

Shares outstanding are defined as the total number of shares in a company that is currently held by its shareholders. When a private company wants to raise capital, it undergoes the process of filing an initial public offering (IPO), selling its ownership in itself by the method of distributing shares on any public stock exchange.

A company can also distribute more number of shares at a later date in case they need to raise more capital or buy back the stock to reduce the total value of shares outstanding. Because of this phenomenon, the number of shares outstanding fluctuates on a frequent basis. The stakeholders often use the total value of the shares outstanding to get a better idea of the capital a company has raised through the investors.

Difference between Market Capitalisation and Shares Outstanding

Both market capitalisation and shares outstanding are an important part of the financial analysis of any company. The stakeholders of any organisation need to know about these two concepts in detail. There are several points of difference between market capitalisation and shares outstanding, and we must discuss below to get a deeper insight into this topic:

Market Capitalisation

Shares Outstanding

Definition

Market capitalisation is defined as the total market value of a company at a particular moment in time.

Shares outstanding are defined as the total number of shares of a company that are currently being held by its shareholders.

Calculation

The company’s market capitalisation can be determined by multiplying the market price of one share of the company stock with the total number of outstanding shares of a company.

The shareholder equity of a company is calculated by determining the total shares which a company has divested to its shareholders.

Scope

Market capitalisation has a wider scope when compared to shares outstanding.

Shares outstanding have a narrower scope when compared to market capitalisation.

Conclusion

Both market capitalisation and shares outstanding have a number of differentiating factors. They are extremely useful both for the company as well as for the investors. The stakeholders can use the information derived from these two concepts to measure the actual size of the company as well as lay a proper chart with regards to its future growth prospects.

Frequently Asked Questions

How do you determine a company’s market capitalisation?

One of the primary ways which will help determine the market capitalisation of a company is by the method of referring to their annual report. Although the actual figure may not be reported in its annual report, it will include the total number of shares and the share price on a specific day. Anyone can use those figures to determine the market capitalisation.

What are some of the factors that will affect the market capitalisation of a firm?

There are a number of variables that may influence the total market cap of a company. Some of them are major changes in the stock valuation or changes in the total number of shares issued by the company. The number of outstanding shares would also get increased by any exercise of warrants on the company’s stock, which results in a dilution of its current value.

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