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Market value definition

Market value definition - Does stock selection according to market value make sense?

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The market value of a company describes the total value of all shares on the market. This value is also referred to as stock market value or market capitalisation.

In this article we explain what market value is and how you can calculate it. We will also tell you what advantages and disadvantages the stock market value has as an indicator for your share trading.

Definition of market value: What does it mean?

The market value describes the arithmetical total value of all outstanding shares of a listed company. The outstanding shares are all shares that are in circulation. They are therefore all shares held by investors or by the company itself. The market value is also referred to as market capitalisation or stock market value.

Market value of companies in share trading

The market capitalisation helps investors who use MT4 to better assess the risk of an investment in shares. As a rule, the higher the market value, the lower the risk.

Companies are divided into different categories and company sizes with regard to their market capitalisation. The market value is divided into the following three categories:

  •     Large-Cap
  •     Mid-Cap
  •     Small-Cap

A large-cap is a company that usually has a market capitalisation of at least 10 billion US dollars. Mid-cap companies have a market value between 2 billion and 10 billion US dollars. Small-cap companies have a market capitalisation between 300 million and 2 billion US dollars. The shares can thus be categorised quickly and easily.

Large caps are mostly established companies that have been on the market for a long time and therefore offer greater security. The share prices are also usually more stable. Therefore, investments in large-cap companies offer good opportunities especially for long-term investors. Small-caps, on the other hand, are mostly young companies with less historical data. They carry higher risks, but also offer significantly more opportunities. Small-caps and mid-caps are usually much more volatile than large-cap companies. Such stocks are particularly suitable for traders who want to exploit volatility for profits.

Calculating the market value of a company

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The market value of a company is calculated by multiplying the number of shares outstanding by the current share price.

Market value = number of shares in circulation x share price per share.

It should be noted that the share price is subject to daily fluctuations. Thus, the market value of the company also changes daily. The number of shares issued, on the other hand, remains constant over a longer period of time. However, the number of issued shares can also change, for example through a share split or a reverse stock split. However, the market value remains the same in the case of a share split or a reverse stock split.

In the case of a share split, the number of shares issued is increased. However, the value of the individual shares decreases proportionally, so that ultimately the market value remains the same. In the case of a reverse stock split, it is exactly the opposite. Shares are removed from the market, which increases the value of the remaining shares accordingly.

After a share split or a reverse stock split, the new number of shares in circulation must therefore be taken into account. Otherwise, incorrect calculations of market capitalisation will result due to the new share prices per share.

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