In this tutorial, we're going to review market capitalization, which measures the total value of the equity of a company.
Market Capitalization
Definition of Market Cap
A company's market cap is equal to its stock price times the number of shares outstanding. It measures the total equity value of that company.
Example: Mortgage
Let me explain the concept of equity value. Let's say you have a home that cost $1 million. You borrow $750000 from the bank and you put in two hundred fifty thousand dollars. The equity is two hundred and fifty thousand dollars. The total value is one million dollars.
But there's also a seven hundred fifty thousand dollar claim that the bank has. So your equity is only the two hundred and fifty thousand. That's what market cap measures. It measures the equity value owned by the shareholders for a tutorial on enterprise value, which is the equivalent of the home price. In this example, see our tutorial on enterprise value.
AAPL vs BKNG
Let's look at an example. Which company's total equity value is higher? Apple or booking holdings to start? I'm going to compare the stock prices of both. Apple is currently at two hundred and eighty-seven dollars and forty-seven cents.
Two eighty-seven forty-seven Booking Holdings, which owns Priceline and Kayak Ticker is BKNG
The stock price is one thousand five twenty-one, sixty, and sixty cents. Now, just looking at these stock prices, you might say, well, booking is worth more than Apple. And we all know that that's not the case. Why? Because Apple has more shares outstanding. And therefore, when you multiply it, the total market cap or the total equity value is greater for Apple than it is for booking.
Now, it is true that one share of booking is worth more than one share of Apple. But that doesn't mean that bookings equity or market cap is greater than Apple.
Total Shares Outstanding
So next, we have to find the total shares outstanding. To do so, I'm going to go to BAMSEC. I'm going to type in the ticker AAPL and go to its latest financial report, the Q1 report. On the bottom of the first page of that report, you can see that Apple has 4.375 billion shares outstanding.
I'm going to paste that into Excel here. Multiplying those two, and making the column a little bit bigger, I can see that Apple has a market cap of yes, that's one point two five, seven trillion dollars. That's Apple's market cap. Let's find the total shares for BKNG.
I go to BAMSEC.
I type in the ticker BKNG go to the latest financial report, in this case, is their fiscal year twenty nineteen report their 10-K and on the bottom of the first page, I'm going to see that there are forty one million shares outstanding.
Total Equity Value
Putting that into Excel.
I then multiply the shares times the stock price to get a market cap of sixty-two point four seven nine billion dollars. So Apple's market cap is significantly greater than bookings, even though booking has a higher share price.
Recap
To recap, a company's market capitalization is its stock price times the number of shares outstanding. And it measures the company's total equity value.
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