A market value of equity is a term used to identify the total market value of a company’s outstanding shares of stock. Considered by many to be essentially the same as market capitalization, this type of financial assessment is often utilized to determine the size of a given business and provide investors with clues regarding the level of risk associated with those outstanding shares. The market value of equity for any company will change on a fairly regular basis, since the variables that are used to determine that value change regularly.
Calculating the market value of equity requires identifying the current stock price for shares issued by the company. That figure is then multiplied by the number of outstanding shares available in the marketplace. The result of this calculation provides a good idea of the total cash value of the outstanding shares, at least as of a specific date. Since both the number of outstanding shares and the price per share is likely to change frequently during any trading week, calculating the market capitalization for successive periods can provide valuable information regarding shifts in that total cash value.
Investors find the market value of equity helpful in making decisions regarding which assets to purchase, which ones to hold onto, and which assets should be sold, based on current shifts in the marketplace. An investor who wishes to create a balance between investments within a portfolio may use the information to identify companies of specific sizes, assess the degree of volatility associated with their stock offerings, and then determine how many shares of each of those companies to purchase. This makes it possible to include large and small companies in the portfolio and arrive at an allocation of assets that allows the investor to move the portfolio in the desired direction. Many investors will determine the market value of equity as a means of diversifying investments in a manner that makes it possible to offset losses incurred with one investment with gains realized with other investments.
As with most types of calculations used in investment strategies, the market value of equity is only as accurate as the data used to make the assessment. In addition, it is important for investors to correctly interpret the result of the calculation in order for it to be of any real help in making investment decisions. One common error made when using the market value of equity as a resource for investing is the failure to realize that many different factors can influence shifts in both the number of shares in the marketplace and the current price for those shares. Failing to consider those factors may result in acquiring investments that look solid today, but experience a significant decrease in market value within a very short period of time.