6. What is Market Capitalization? – Part A

Before understanding what Market Capitalization is, let’s understand three important concepts:

6.1. Price per Share

The Price per Share is the amount shareholders are willing to pay to get one share of a corporation. You don’t have to calculate it as the current stock price is readily available at the Pakistan Stock Exchange (PSX) website. You can also view real-time stock prices in the FinPocket mobile application.

Generally, share prices depend upon the supply and demand. If more buyers are interested in purchasing a stock, this will increase the demand and drive the stock price upwards. On the other hand, if there are more sellers than buyers, the price of a stock will go down.

 

6.2. Shares Outstanding:

Shares Outstanding – also called issued shares – is simply the sum of all the shares held by shareholders and owners of any firm. Consider a company called “Watch Z” involved in manufacturing and selling of wrist watches:

  • The general public holds 9000 shares of this firm. Individuals with stake in corporations are called ‘Retail Investors.’
  • Company A and Company B both hold 5000 shares of Watch Z. Corporations that hold shares in other firms are called ‘Institutional Investors.’
  • Ali and Fatima – owners of Watch Z corporation – also hold 20,000 shares of this firm.
  • Ibrahim, who is the manager of this firm, holds 6,000 shares of Watch Z.

Therefore, the total outstanding shares of Mobile Z corporation would be 40,000.

Shares Outstanding keep on changing. Generally speaking, shares outstanding will increase if a company issues more shares. However, a company is also allowed to take back or buy back its shares from the general public. In that case, shares outstanding will decrease. In the case of Watch Z, had the company bought back 4,000 shares, the total outstanding shares would have reduced to 36,000.

6.3. Share Turnover:

Share Turnover indicates how easy or difficult it is to trade shares of a particular stock in the market. If a security can be easily sold and bought in the stock market, it’s called a ‘liquid’ security. Here is the formula to calculate Share Turnover for a single year:

$$ \text{Share Turnover} = {\text{Total number of Shares Traded in the year} \over \text{Total Shares Outstanding in the period}} $$

For example, in year 2017, 1 million shares of Company X were traded. This company has 10,000 shares outstanding. The share turnover would be 100 times.

So, what makes it difficult to trade a stock?

  • Consider a case where no one wants to buy stock of Company X. In that case, the shares of this firm will not change hands that often and therefore, the share turnover will be low.
  • Consider another scenario where the stock of Company Z has been soaring and has increased from Rs. 5/share to Rs.70/share in a month. This may limit the number of people who are capable of buying these expensive shares and therefore, will reduce the share turnover.