A Company’s Stock Price May Have Very Little to do With The Size of Company

I think there is this common misconception that must be addressed for those that don’t have any interest in “the market.”  A Company’s stock price on a particular day does not provide information in of itself of the size of the company.  An easy example:

  1. Stock 1 – Closes at $608.21 on July 10, 2012
  2. Stock 2 – Closes at $124,985 on July 10, 2012
  3. Stock 3 – Closes at $648.65 on July 10, 2012

Which Company is “worth more”? If you guessed Stock 2 or 3 you are wrong.

  • Stock 1 is Apple – One of the largest (if not the largest) company in the world in terms of market cap
  • Stock 2 is Berkshire Hathaway – Despite being infinitely more expensive to buy one share the company is worth less than half of Apple
  • Stock 3 is Priceline – Priced more than Apple PCLN is less than one tenth of the size

How could any of this make sense?

What is a Company’s Market Capitalization?

Investopedia provides a good definition of Market Capitalization,

The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures.

So keeping with our example above,

  • Apple with a stock price around $600 has a market cap of over $563 Billion
  • Berkshire Hathaway with a stock price of around $125,000 has a market cap of about $205,600,000,000
  • Priceline with a stock price of about $650 has a market cap of about $31 Billion

You can buy a share of Facebook for around $30 bucks but the company is valued at about $100 Billion!

Market Cap and Investing

When investing there are distinctions between market cap and investment groups:

  • Large Cap: $10 billion plus
  • Mid Cap: $2 billion to $10 billion
  • Small Cap: Less than $2 billion

It always amazes me that a company worth less than $2Billion is considered “small” lol.

Just like all topics of value and worth just because something is expensive doesn’t mean it is a good buy.

Did this topic ever confuse you?

6 Responses to A Company’s Stock Price May Have Very Little to do With The Size of Company

    • Seriously! Even a tiny publicly traded company on the pink sheets is large in terms of market cap (but maybe not profit lol)

  1. I agree with Jenna. Small to us but they are publicly traded which is quite a feat. Definitely good information for those that don’t know about market capitalization.

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