A good way to think about market cap, is if a company had 100 equal shares, and those 100 shareholders stood in a room. Then if 2 of them traded shares and told everyone what the value of the company was, and the other 98 didn't say anything, so the statement of the 2 goes down on record. That's market cap. It's the instant opinion of a minority of shareholders as to the going value based on the trading value of a small percentage of shares. In other words, it means absolutely nothing.
That's bullshit. If a seller finds a buyer on an open market you've, more or less, found a value for the good. If it was too out of wack (either on the high or the low side) the other 98 people in the room wouldn't have stood pat. 2% of a company changing positions in a single day is a very high number.
Have to disagree strongly. A seller and a buyer have found a value for the individual share (or package of shares). The value of the company is not the multiple of shares x price paid, because not every share in the company is going to trade at that value. There will be a marginal change in price for each additional share sold. The other 98 people in the room may have other reasons for not buying or selling. They may agree with the price, they may not. They may think the price is going higher, they may not be even listening to the prices.
Think of it like inventory. If you have 100 cars in a lot, and you sell the first for 10,000. Is the stock worth $1m? For accounting purposes, yes. Are you going to get $1m if you sell all the cars - no, you're not. Either of two things is going to happen - only 50 people want the cars and you have to start discounting to move the rest, or, once alerted to the sale of the cars, 200 buyers turn up and the price goes higher. So the total value of the cars isn't really $1m, apart from on an accounting sheet. Same as market cap.
The other 98 people in the room haven't assigned a value to the item. You've only found a market for 2% of a company. The other 98 people may sell at a higher or lower amount, but for each one that did, there has to be a supply of buyers at that level.
Summarized : market cap is the total value as derived from the current opinions of the people trading shares. It's not the same as total market value, because you could never buy the entire company for that amount.
Yes, I know 2% turnover is a high value, chosen to make it a simple example.
Your assumption is that market cap dramatically overstates the market value of companies. Your car analogy is flawed.
Why not look at mergers and acquisitions? When companies attempt hostile takeovers, are they making bids that undercut the market's own valuations? Do people like to sell their shares at large discounts? No. Companies have to pay a hefty price premium over the existing market value.
No, if you re-read it, I implied that the market cap could be lower or higher. The car example said that either you have more buyers than you need, or less buyers than you need. You would end up with less than, or more than $1 million dollars, but it's unlikely you'd end up with exactly that amount.
Indeed an open-market acquisition is a good indicator of the value of the company - the value of anything being what someone is willing to pay for it.
Wow! This article certainly gives you a different perspective on how companies like Google, Apple, and Microsoft really are small as compared to giants like GE, Exxon, etc.
What blows me away is that Wal-Mart has 2 million+ employees! A piece of information that would be interesting as a comparison is the number of government employees there are in different countries ...
How cash balances are measured is a matter for considerable debate.
In general, it's important to distinguish cash balance and flows from investments vs operations.
Banks often report their vast cash balance under operations, as holding and lending cash is their core business, not something they do on the side.
Accountants like to project this aura that they're perfectly predictable categorisers of financial truth, but it's bunk. When you can change a company's reported cash balance by billions of dollars through a clever argument, you're well and truly into the land of politics.
I'd argue that this is simply a matter of the nature of money and investments. When you're a regular Joe cashing a paycheck, the numbers on your bank account seem like absolutes. But on the scales that large companies operate, things are a lot more fluid. For instance, banks don't have direct access to all the money their account holders have deposited, the exact value of a large investment is subject to all sorts of market conditions, inflation and currency fluctuations changes the actual value of things over time etc. Even if you look at the economy of a single person, this phenomenon becomes apparent.
Remember that "reported cash balance" is just a number. The actual assets backing that number can always be tracked down somewhere.
