Stock Price of 100 Yen vs. 10,000 Yen: Which Company is Bigger? Misunderstanding Stock Prices Without Knowing 'Market Capitalization'
When looking at stocks, have you ever thought about the following?
“A stock price of 100 yen seems cheap.”
“A stock price of 10,000 yen is too expensive.”
As I studied stocks, I felt that at first, it is easy to fall into the trap of thinking that “stock price equals the value of the company.”
But in reality,
a company with a stock price of 100 yen can be “bigger” than a company with a stock price of 10,000 yen.
Why is that?
To know the answer, it is important to understand “market capitalization.”
The key to knowing the answer is market capitalization.
The method for calculating market capitalization is surprisingly simple.
Market Capitalization = Stock Price × Number of Shares Outstanding
is the formula.
For example, suppose there are these two companies.
Company A
Stock Price: 100 yen
Number of Shares Outstanding: 2 billion shares
→ Market Capitalization 200 billion yen
On the other hand,
Company B
Stock Price: 10,000 yen
Number of Shares Outstanding: 10 million shares
→ Market Capitalization 100 billion yen
Looking only at the stock price, Company B is 100 times that of Company A.
However, when looking at the price the market has placed on the entire company, Company A is actually larger.
Once you understand this,
‘It’s cheap because it’s 100 yen’
‘It’s expensive because it’s 5,000 yen’
—judgments based solely on stock price like these will start to look a bit different.
Stock price is the price of ‘one slice of the company’
I think of the difference between market capitalization and stock price with this image in mind.
Stock price is the ‘price of one slice of the company.’
Market capitalization is the ‘market price placed on the entire company.’
Whether you divide a pizza into four slices or eight, the size of one slice changes.
However, the size of the pizza itself has not changed.
Stocks are similar.
Because the number of issued shares differs, you cannot tell the size of the entire company just by comparing the price of one share.
Thinking about ‘this stock might increase fivefold’ using market capitalization
And, knowing market capitalization allows for another interesting perspective.
For example,
Stock price: 1,000 yen
Market capitalization: 50 billion yen
If you find a company like this and think,
‘I hope it becomes 5,000 yen in the future’
—that is what you might think.
The stock price is five times higher.
Simply put, the market capitalization at that time is also about five times higher.
50 billion yen → approximately 250 billion yen
is the result.
So, let’s consider,
‘Could this company become a business valued at the 250 billion yen scale?’
by thinking about it.
How far can sales grow?
What about profits?
What is the market size?
Is it stronger than the competition?
How many years can it continue to grow?
When you think this way,
your perspective shifts from ‘the stock price seems likely to rise’ to ‘the company seems likely to grow.’
Your perspective changes.
Market capitalization can also be used to find ten-baggers.
This is also important when considering ’10x stocks.’
Market capitalization of 10 billion yen
→ 100 billion yen
versus,
Market capitalization of 5 trillion yen
→ 50 trillion yen
In that case, the scale of corporate growth required for the same 10x increase is completely different.
That is why I believe
it is more important to look at ‘how much the company is currently valued at’ rather than searching for ‘companies with low stock prices’
.
And from here, if you look at
Market Capitalization → P/E Ratio → EPS → Growth Rate
in that order, corporate analysis becomes quite interesting.
I have summarized ‘market capitalization’ in detail for beginners.
In this article, I explain
‘What exactly is market capitalization?’
starting from
the difference from stock price, calculation methods, characteristics of large-cap and small-cap stocks, the relationship with P/E ratios, and how to think when looking for ten-baggers, using concrete examples for beginners.
In particular, I would like you to try using the mindset of
‘What will the market capitalization be if it reaches that stock price?’ rather than ‘What will the stock price be?’
when looking at stocks.
‘It looks cheap because the stock price is 100 yen’
—this content is especially for those who have thought this way before👇
▼ What is market capitalization? A super simple explanation of the difference from stock price for beginners