Lesson: Market Capitalization

Instructor: Nick Palazzolo

In this lesson, explore the vital concept of market capitalization with Nick Palazzolo, CPA, who demystifies its relevance in gauging the total value of a company. He emphasizes the superiority of market cap over stock price when assessing a company’s worth, highlighting how market cap is immune to manipulation through stock buybacks or splits. Through engaging examples, Nick clearly illustrates how to calculate market cap using shares outstanding and share price, and stresses its importance in making informed investment decisions. He also clears potential confusions between market cap and total market value, reinforcing the concept's fundamental importance in finance and investment arenas.

Updated: May 31, 2022 Create an account

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Transcript

Instructor: Nick Palazzolo

Nick Palazzolo is head instructor of ExamPrep.ai CPA Review. Nick's teaching style is engaging & upbeat, combining practical Big 4 tax & assurance expertise with years of 1-on-1 coaching. His lessons are concise and emphasize what you need to know to pass. Whether you're a recent grad or working full-time, we’re confident you can conquer your CPA exams with Nick’s review.

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Market capitalization, now often called market cap, and for the sake of my own breath and not having to take too many of them, I'm going to call it market cap. So market cap is super important. Now I'm going to kind of just go into a little bit of investing for a second. If anyone says, oh, I think that the price of this company is going to go up to $10 or to $20, personally, I immediately cancel that out, generally speaking. I mean, unless they understand market cap and they're just saying that to put it on a different level, that's fine. But the dollar price of the stock doesn't mean anything. The dollar price can be manipulated by share buybacks and by share dilution and stock splits and all. Market cap is everything. It's the total value of the company.

I made an example. I'm going to use my example. All right? So it's the total value of the company. How much money would I need to have if I wanted to buy 100% of this entire company right now? It's the amount of shares outstanding, right? So Apple, let's say, has a million shares outstanding, and each share is $2. So that's $2 times a million shares. I would need $2 million to buy that company.

Market cap is what's important because the dollar price of the share can be manipulated. Because the amount of shares, these can all be manipulated. But if the market cap is $2 million and it doubles to $4 million, well, your investments doubled no matter how much you own of the company. So market cap is what's important. The dollar price is not important.

So if anyone starts rattling off, I'm not knocking any of you. If you do focus on the

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