Definition: Market value of equity, also called market cap, is the total market price of all outstanding shares of an organization. It’s calculated by multiplying the total number of outstanding shares by the market price per share.
What Does Market Value of Equity Mean?
What is the definition of market value of equity? Outstanding shares refer to all shares of an organization that are owned by a shareholder. Equity refers to an entity’s assets with liabilities subtracted from it. FMV refers to the price that a share would fetch in the market place at that current moment. Understanding these components will make the definition much more coherent.
The actual market value of equity formula is calculated by simply multiplying the company’s stock price currently (FMV) by all of its outstanding shares.
Market cap differs from just the equity calculation (Assets-Liabilities) because it only looks at the inherent value for shareholders. In a sense, market capitalization relies on a different interpretation of equity.
Businesses look at their own market cap to determine their size and track growth. They also use it to evaluate other businesses in the case of a merger or acquisition. Similarly, investors focus on market cap to evaluate if there investment opportunities. For example, they may compare this metric to cash reserves or income metrics to gauge whether the company is under valued by other investors.
Example
Chang is an investor who wants to purchase a very large dry-cleaning company called Clean Daily.
Currently, the company has 40 outstanding shares that Chang estimates to be worth $20 per share.
Thus, Clean Daily’s market capitalization is:
MVe = $20 x 40 outstanding shares = $800
Chang can compare this with other companies in the same industry to help him decide whether this is a good investment or not.
Summary Definition
Define Market Value of Equity: MVE means the market capitalization of a company.
