InvestorQ : What is market capitalization and is it a good measure of shareholder wealth?
Sam Eswaran made post

What is market capitalization and is it a good measure of shareholder wealth?

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swati Bakhda answered.
1 year ago
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To understand the concept of wealth creation in stock markets, one needs to understand the concept of market capitalization. The concept of market capitalization is quite simple. It is the product of the number of shares outstanding and the market price of the stock. The change in market capitalization actually measures the wealth created by the company over a period of time. Let us understand this concept with a basic example.

Assume that there is a company ABC Ltd. which is listed on the NSE. On 01st January 2015, the company had 2 crore shares outstanding and the market price of the stock was Rs.58. The market capitalization of the company, therefore is Rs.116 crore (2 crore shares X Rs.58).

In August 2015, the company issued bonus in the ratio of 1:1. On 31st December, the price of ABC Ltd. was Rs.48 (post bonus). Therefore the market capitalization of the stock on the last day of the year will be Rs.192 crore (4 crore shares X Rs.48). Remember the number of shares have doubled to 4 crore because of a 1:1 bonus. Therefore during the year 2015, ABC Ltd. has created wealth to the tune of Rs.76 crore (Closing Market Cap of Rs.192 crore – Opening Market Cap of Rs.116 crore). Thus market cap is one of the easiest methods of understanding the wealth created by a company.

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