Get to know Market Share vs. Market Capitalization

Those of you who are in the business and investment world, of course, are familiar with the terms market share and market capitalization. Although both are often discussed, it is important to be able to know the difference between the two, especially for business or startup owners.

This not only needs to be understood by business people or investors, but also company executives who are involved in funding. Therefore, let's look at the following review to find out the difference between market share and market capitalization.

 

What is Market Share?

Market share is the total value of customer purchases of a company's product, both goods and services, compared to the total product in a particular industry.

Market share can be understood as the percentage of the company's total sales of the total value of products in the industry. Apart from that, here are some things you need to know about market share:

• The portion or percentage of the market obtained by the company. Market share value is obtained through total sales compared to overall industry sales.
• The market share calculation consists of the total sales of the company within a certain period of time and the total sales of the industry in which the company operates during that time period.
• For example, in a glass industry, the total number of products sold to consumers is 100 pieces. Of this amount, it turned out that 60 glasses were produced by Company G. Therefore, Company G controlled 60% of the market share or market share in the glass industry.

It should be understood that controlling 100% of the market share is not a good thing for the company. This is due to the risk of changing trends in the market caused by changes in consumer tastes, fashions, and other aspects.

 

What is Market Capitalization?

Market capitalization is a term that refers to the aggregate valuation of a company based on the current share price and the total number of shares outstanding. This value is obtained by multiplying the current share price of the company by the total outstanding shares of the company.

Knowing the market capitalization of a company can help investors to know the potential return and risk of its shares. The greater the market cap value of a company, the more likely investors are to invest

Market capitalization is formed when the shares of a company are traded to the public through an initial public offering or known as an IPO (Initial Public Offering). In the stock market, stock price movements are determined by the amount of demand and supply.

How to determine the market capitalization of a company? In short, calculating the company's market cap is done as follows:

Market Cap = Total Shares Outstanding x Share Price per share

You may be wondering, why is there a need for market capitalization itself? Here are some things that show that market capitalization is an important thing for companies.

• Universal method. Market capitalization is a method used almost all over the world in evaluating a company. Therefore, every investor from different parts of the world can easily understand it regardless of geographic or economic factors.
• Precision. Market fluctuations are always risky. The market capitalization is one of the right ways to evaluate it, including assessing the risks associated with the company.
• Influence on the index. This method can be used to weigh the shares of different companies indices in the stock market. Thus, stocks with higher market capitalization will have a higher weight in the index.
• Comparison function. Because of its universal nature, market capitalization can be used to evaluate the value of any company. Investors can learn the value of a company as well as the risks that may come with investing in it.
• Balancing the portfolio. Investors must be able to maintain a stable portfolio and ensure that they do not risk large losses from their investments. Market capitalization can help investors to choose companies and their possible risks.

In practice, there are types of stocks that are distinguished based on the value of market capital. Citing an article from the American Journal of Humanities and Social Sciences Research (AJHSSR), there are three types of stocks, namely:

1. Blue Chip/Big Cap

It is a company with a capitalization value of more than Rp. 100 trillion. Blue chip stocks are also known as tier one stocks whose performance will greatly affect the overall JCI. In general, blue chip stocks are owned by companies with excellent financial conditions that have been operating for a long time.

2. Middle Tier Shares/Middle Cap

Namely companies whose capitalization is in the figure of IDR 1-5 trillion. Companies that fall into this category are often considered as companies with stable economic conditions and are in the process of developing.

3. Small Cap Shares/Small Chip

Refers to companies with a capitalization value below Rp1 trillion. Stock price movements in this category tend to be more volatile or volatile with relatively low prices.

Before investing in a company's stock, it is important to know the value of the company, both in terms of market share and market capital. Investors must be able to maintain investment portfolios from companies with healthy market capitalization. Therefore, companies that have entered the stock exchange must also maintain the stability of the company's value in order to be able to attract the attention of investors in providing funding.