Methodology

Stocks

Module 1

Question 5

What does the market capitalisation of a company mean?

What are stocks?

When you buy stock in a company, you become a shareholder in that company. This basically means that you have become an owner in that company. 

As an owner of a company, the investor has a legal claim over the assets and income of that company. So, any money made by the company should be distributed to the shareholders.

In the past, a certificate would have been issued to an investor by the company, outlining they ownership of the stock of the company. Today, however, investors don’t usually get stock certificates, as this is dealt with for them by their stockbroker.

The stockbrokers are organisation that are trusted by investors to look after their investments, including all of the paperwork and transactions. Nowadays, investors generally buy and sell stocks using a stockbroker.

What does the stock price mean?

When an individual buys stock in a company, they are unlikely to be the only owner. This is unless that individual has a lot of money and can afford to buy the whole company on their own – which is unusual.

In order to keep stocks attractive to investors, companies tend to divide the total value of their company into millions of individual shares. This means that the value of purchasing one share is low, with millions of people around the world being able to invest.

The total value of all of the shares is called the market capitalisation. The market capitalisation refers to the total value of the company if all of the stocks of a company were added together.

For instance, as of April 2022, Apple has a market capitalisation of around 2.72 trillion dollars, with approximately 16.52 billion shares in total. To find the share price, you would divide the market capitalisation by the number of shares outstanding – which would lead to a figure of around $165.

Therefore, the stock price represents the value of just one share. For which there could be millions, if not billions, issued by the company.

Stocks as an investment

Stocks are considered to be one of the riskiest type of investment. This is because the amount of money that an investor can expect to make is based on whether a company is successful or not.

If something goes wrong at a company, the investor could make a loss or a small amount of money, when compared to other types of investment.

Despite the risks, stocks are attractive because the upside is potentially unlimited. If a company can consistently perform well over time, its stock price may frequently increase. This would make the investor richer and richer over time.

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