What are market caps and what is the All Ords index?

fureien · 26 August 2009

Hi guys. Even though ive been doing stocks for a while now. I still dont know what market caps are for and how you can use the figures to determine anything.

From an educated guess, I think they are the total amount of shares issued on the market in $ terms? is that right?
How do people use it? Like ive seen ppl mention how theres heaps of volume despite having a low market cap or something.

Also how do you interpret the ALL ords index and the ASX200?
I hear ppl saying how the index is going to hit 3500 or something or how significant 4000 is.

I have no idea what any of that means. From a guess, im thinking that its essentially (just as the name suggests) an index of a certain group of stocks, like asx 200 and the value is something like OBV that changes depending on the net overal movement?

That was just a guess.

Can somebody clarify? And also give examples on how one would use the index and interpret it?

thanks

awg · 26 August 2009

mate, without seeming disrespectful, google will answer all your questions

cuttlefish · 26 August 2009

market cap (market capitalisation) is the value of the whole company based on current price of the shares. So it is the number of shares on issue for that company multiplied by share price.

If a company has 500 million shares on issue and the price is 10c it has a $50 million market cap.

If a company has 20 million shares on issue and the price is $2 then its market cap is $40 million.

When your buying a share for investment, you are buying a small part of the business - that means you are getting a share of its profit or potential profit - knowing market cap is thus important because it gives you and idea of the proportion of that profit or potential profit that is attributal to your share.

e.g. Company A - market cap $100 million, profit $10 million then profit per share (known as earnings per share i.e. EPS) = 10c per share.

Company B - market cap $1 billion, profit $10 million then EPS = 1c per share

So you'd be prepared to pay more for the shares in company A than company B even though even though they had the same profit because company A has a lower market capitalisation and thus the earnings on a per share basis are higher for company A than company B.

Julia · 27 August 2009

The ASX provides a good Education section which imo everyone beginning in shares should read before buying anything.

Go to www.asx.com.au and click on the "Education" link.

Also Sir O's Newbie Lessons in the Beginners' Lounge on this forum.

Sean K · 27 August 2009

Market caps can be very important when evaluating minows, especially in resources. If you compare the market cap and enterprise value to what companies possess as assets in the ground you can quickly compare companies for comparitive value at a basic level. Then go to the detail to assess why one might be cheaper than the others. If you can't find a real reason, you may have discovered a 'cheap' stock. Check the Iron Ore Junior Comparison thread, for an example.

gooner · 27 August 2009

cuttlefish said:
market cap (market capitalisation) is the value of the whole company based on current price of the shares. So it is the number of shares on issue for that company multiplied by share price.

If a company has 500 million shares on issue and the price is 10c it has a $50 million market cap.

If a company has 20 million shares on issue and the price is $2 then its market cap is $40 million.

When your buying a share for investment, you are buying a small part of the business - that means you are getting a share of its profit or potential profit - knowing market cap is thus important because it gives you and idea of the proportion of that profit or potential profit that is attributal to your share.

e.g. Company A - market cap $100 million, profit $10 million then profit per share (known as earnings per share i.e. EPS) = 10c per share.

Company B - market cap $1 billion, profit $10 million then EPS = 1c per share

So you'd be prepared to pay more for the shares in company A than company B even though even though they had the same profit because company A has a lower market capitalisation and thus the earnings on a per share basis are higher for company A than company B.

Not sure I would use the advice given here for education as it is wrong.

Company A with a market cap of $100m and profit of $10 million - you can say it has a P/E of 10, but you can say nothing about EPS because number of shares are not quoted in this example.

Company B - you can say it has a P/E of 100 ($1b/$10m) using the information given, but you can say nothing about EPS as number of shares not given. You would expect company B to have better profit growth potential as it has a high P/E. If not it is probably overvalued

And the conclusion about being prepared to pay more for company A shares than company B makes no sense as you do not know what EPS for the two companies.

Probably better off using Google and a reputable source.

swm79 · 27 August 2009

gooner said:
You would expect company B to have better profit growth potential as it has a high P/E. If not it is probably overvalued

actually, you have to be wary of the P/E ratio too. its isnt a strict standard gauge and EASILY be manipulated, or useless

for one, its backward looking - it uses the earnings from the company's most recent 12-month period

two - they are highly impacted by the way a company chooses to raise capital. if they use debt they will often have lower P/Es (and therefore look cheaper) than companies that raise money by issuing shares, even though the two companies might have equivalent values.

fureien · 27 August 2009

thanks for that guys. I noticed that Cuttlefish's example didnt include number of shares on issue. But i understand what he was trying to say. probably forgot to include it.

I kinda get how you can utilise Market cap now. I havent been doing much fundamentals lately and only technical analysis thats why lol

what about the Indexes then? How do they work and how do i interpret them?

Knobby22 · 27 August 2009

cuttlefish said:
market cap (

If a company has 500 million shares on issue and the price is 10c it has a $50 million market cap.

If a company has 20 million shares on issue and the price is $2 then its market cap is $40 million.

.

Actually he did say how many shares were on issue, i have highlighted it above.

gooner · 27 August 2009

Knobby22 said:
Actually he did say how many shares were on issue, i have highlighted it above.

But he then used two different examples A and B to calculate EPS which were wrong.

Knobby22 · 27 August 2009

gooner said:
But he then used two different examples A and B to calculate EPS which were wrong.

Oh yea.

cuttlefish · 27 August 2009

gooner said:
Company A with a market cap of $100m and profit of $10 million - you can say it has a P/E of 10, but you can say nothing about EPS because number of shares are not quoted in this example.

Company B - you can say it has a P/E of 100 ($1b/$10m) using the information given, but you can say nothing about EPS as number of shares not given.

Yep you're correct - silly mistake - earnings can only be expressed as a ratio against price in the example I gave. You need either the share price or number of shares on issue to be able to calculate actual EPS in cents so there's a flaw in the example I gave.

Must have been late at night when I posted that - I'll check my examples more thoroughly next time ... (Actually in future I'll just refer original poster to google because a quick search for "market capitalisation explanation" returned 287,000 hits.).

Nice to see you're on the ball there though gooner!

And yes a low PE ratio is only one factor in getting an idea as to whether a company is undervalued or not. There are a range of metrics and then a whole lot of qualitative factors that need to be taken into account in determining what the fair value for a company may be. (and there's a large subjective element, if there wasn't the market would be a pretty boring place).

gooner · 27 August 2009

cuttlefish said:
Yep you're correct - silly mistake

.

And saved for posterity for ever in cyberspace.

You can show your grandkds one day

I think my stupidest one was a comment I posted asking why a company had gone into pre-open, not realising it had just gone 4pm...

cuttlefish · 27 August 2009

gooner said:
And saved for posterity for ever in cyberspace.

You can show your grandkds one day

haha yes ... thats an interesting topic in its own right isn't - how cyberspace will track our lives and personalities (and mistakes) over the years.

Timmy · 27 August 2009

fureien said:
what about the Indexes then? How do they work and how do i interpret them?

Start here to understand the indices:

Index overviews
and this one: GICS sector overviews

Going through these pages and links from them will give you a good overview on what they are all about, and you can learn even more if you wish.

As for interpreting them, with one eye is the standard practice it seems

What are market caps and what is the All Ords index?

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