In this post, I am going to talk about a very simple but very important concept related to the share market. We will talk about a very basic topic: What is share price and what is market capitalization. You will understand its concept. You may find it quite simple to hear, but let me tell you that many educated people also do not understand these things. For example, suppose there are two companies so the stock of a company is worth ₹50. And the share of another company is ₹ 500. So many people think that if there is a share of ₹ 50 then its tendency to go up to ₹ 500 is very high. There are chances of getting more growth. Maybe a share of ₹ 500 can go up to 5000 in a very long time. But is this the right comparison? In this post, you will understand that this is not the right comparison at all. And exactly what is meant by the share price and what is meant by market capitalization. I will explain this to you with a comparison also. You make big mistakes when you invest in the stock market. You probably don't compare stock market investment well.
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| What is Share Price and Market Capitalization? |
What is Share Price and Market Capitalization?
You should know the basics of the share market first. After that, if you invest then I am sure that you will be able to earn very good returns. So without any delay let us understand what share price and market capitalization are. Let us understand share price and market capitalization with an example. Suppose there are two companies, one company name is ABC Company and the other company is XYZ Company. Now there is a slight difference in the share price of both. The share price of ABC company is ₹10. So the per-share price is ₹10. And the price of one share of another company which is XYZ is ₹ 100. So many people will think that ABC company’s share is only ₹ 10. It is cheap so we buy more of it. Chances of its growth will increase, Because on today's date its price is cheap. And since XYZ company’s share is worth ₹ 100, its price is already very high. So we do not buy this stock, the chances of its growth are very less. But is it a right comparison? No, this is not a correct comparison at all. Because here we don't have complete information. So we cannot say which stock is cheap and which stock is expensive.
You cannot tell whether it is expensive or cheap just by looking at the share price. You need other information like how much is the floated number of shares of that company. Suppose ABC company can float any number of shares. It can float one lakh shares. It can also float ₹1 crore to 10 crores shares. Let's say that the total number of shares the company has floated is ₹1 crore. And let's say the total number of shares the XYZ company has floated is 5 crore. Now we need more information. Now we will calculate market capitalization. What is market capitalization? When you multiply share price with the number of shares. Then the market value comes from the company. So the total number of shares is 1 crore. You multiplied it with the price of one share. So what is the total value of ABC company? The total valuation of that company is 10 crore rupees. You will also do the multiplication in the XYZ company. So what is its total value? Its value is Rs 500 crore. So can you compare these two companies with each other? No, you cannot. Because ABC company is a very small company. And XYZ company is a very big company. Their sectors can also be different. Maybe a company of Rs 500 crore may grow very quickly if the economy goes well.
Related Post, What is Authorized Capital, Issued Capital and Paid Up Capital?
So when you want to call share price expensive or cheap. So you should compare a lot of things you compare, and what things do you compare. There are many things like what is the price earning ratio, what's its price to book value ratio? There are many such comparisons. Like how much is the debt of that company? But I hope at least you must have understood market capitalization and share price. See when you talk about Sensex. You must have heard about Sensex. So let me tell you the top 30 companies in the Sensex according to the market capitalization. This means the top 30 companies Sensex consist of top 30 companies according to market capitalization. So in that the top thirty companies' value is taken. Similarly in the Nifty, the value of top 50 companies according to market capitalization is taken. Now if we talk about the most valued company in India. So Reliance was the most valued company for a very long time. Which has been replaced by TCS. So when you are talking about the value. Remember you are talking about market cap. We will also call its market cap In short. We talk about market capitalization when we talk about the value of a company. And second, you should not get confused between market value and book value. Book value is the value according to accounting. And the market cap is basically the market value Based on the market. I hope you must have clearly understood the market capitalization and share price.
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