The market value of a company's equity is the total value given by the investment community to a business. To calculate this market value, multiply the current market price of a company's stock by the total number of shares outstanding. The number of shares outstanding is listed in the equity section of a company's balance sheet. This calculation should be applied to all classifications of stock that are outstanding, such as common stock and all classes of preferred stock.
For example, if a company has one million common shares outstanding and its stock currently trades at $15, then the market value of its equity is $15,000,000.
While the calculation may seem simple, there are several factors that can cause it to poorly reflect the "real" value of a business. These factors are:
- Illiquid market. Unless a company is not only publicly held, but also experiences a robust market for its shares, it is quite likely that its shares will be thinly traded. This means that even a small trade can alter the share price significantly, since few shares are being traded; when multiplied by the total number of shares outstanding, this small trade can result in a large change in the market value of equity.
- Sector impact. Investors may sour on a certain industry or the reverse, resulting in sudden changes in the share prices of all companies in an industry. These changes may have a short-term duration, resulting in declines and spikes in share prices that have nothing to do with a company's performance.
- Control premium. An acquirer should not rely upon the market value of equity when deciding what price to bid for a company, since the current shareholders will want a premium to give up control over the business. This control premium is typically worth at least an additional 20% of the market price of the stock.
The market value of equity is also known as market capitalization.