Difference between Market Capitalisation and Equity

Market capitalisation and equity are fundamental metrics used in financial analysis to assess a company's value and financial health. Market capitalisation quantifies the total market value of a company's outstanding shares, reflecting investor sentiment and market perception. In contrast, equity represents the net worth of a company from an accounting perspective, calculated as total assets minus liabilities.

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What is Market Capitalisation?

Formula: Market Capitalisation = Current Share Price×Total Number of Outstanding Shares

Market Capitalization = Number of Outstanding Shares × Current Market Price per Share

Characteristics Market Capitalisation

• Definition : Companies with a market capitalisation of $10 billion or more.
• Characteristics : Typically well-established, financially stable, and considered leaders in their industry. Examples include major corporations like Apple, Microsoft, and Amazon.
• Risk and Return : Generally lower risk with steady growth and reliable dividends. They are often less volatile compared to smaller companies.

• Definition : Companies with a market capitalisation between $2 billion and $10 billion.
• Characteristics : These companies are usually in the growth phase and have the potential to become large-cap companies. They often have more growth potential than large caps but could be more stable.
• Risk and Return : Moderate risk and return. They offer a balance between growth potential and stability.

• Definition : Companies with a market capitalisation between $300 million and $2 billion.
• Characteristics : Often newer or niche companies with significant growth potential. They can be more agile and innovative compared to larger companies.
• Risk and Return : Higher risk and higher potential return. These stocks can be more volatile and are sensitive to market fluctuations.

• Definition : Companies with a market capitalisation between $50 million and $300 million.
• Characteristics : These are usually very small companies, possibly in the early stages of development or operating in niche markets. Analysts should follow them more widely.
• Risk and Return : High risk and potentially high return. Investments in micro-cap stocks can be very volatile and are often speculative.

What is Equity?

Component Of Equity

• Share Capital : This refers to the funds a company raises by issuing shares. It includes both common stock and preferred stock.
• Common Stock : Represents ownership in a company and entitles shareholders to voting rights and dividends.
• Preferred Stock : Provides no voting rights but has a higher claim on assets and earnings than common stock, often with fixed dividends.
• Additional Paid-In Capital (APIC) : Also known as share premium, this is the amount received from shareholders over the stock's par value. It reflects the additional capital investors pay over the shares' nominal value.
• Retained Earnings : This represents the cumulative net income a company has retained rather than distributed to shareholders as dividends. Retained earnings are used to reinvest in the business, pay off debt, or save for future needs.
• Treasury Stock : This includes shares previously issued and reacquired by the company. Treasury stock reduces the total equity as it represents the company's stock held in its treasury and not outstanding to the public.
• Other Comprehensive Income (OCI) : This consists of revenues, expenses, gains, and losses that are excluded from net income on the income statement. Examples include unrealised gains and losses on available-for-sale securities, foreign currency translation adjustments, and pension plan gains or losses.
• Non-Controlling Interest (Minority Interest) : This is the equity portion in a subsidiary not attributable to the parent company. It represents the interests of minority shareholders in the subsidiary's net assets and earnings.
• Reserves and Surplus : These are specific allocations of retained earnings for various purposes, such as legal reserves, capital reserves, and contingency funds. Reserves are often mandated by law or company policy to strengthen the company's financial stability.

Difference between Market Capitalisation and Equity

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