What do investors need to know about Market Value? Why is it the core of prudent investing?

When it comes to investing, many people tend to focus solely on stock prices. However, the true indicator that matters much more is the (Market Value), because it reveals a deeper truth about the company beyond just the price alone.

What is Market Value really?

Market value is not just a random number displayed on your screen. It represents the total value of the company at that moment, calculated using a simple formula:

Market Value = Current Stock Price × Total Number of Shares

For example, Company AAA has a total of 300 million shares outstanding, and the current share price is 1.50 baht. Therefore, AAA’s market value is 300 million × 1.50 = 450 million baht. That’s it.

Why is market value important? Because it shows how the market perceives the company’s worth. A higher value indicates a strong position; the market trusts its potential.

What drives market value?

Market value is not static; it’s like a living entity responding to its environment. The main factors influencing market value include:

Financial and Business Performance - Companies that are profitable, expanding healthily, and managing resources wisely attract investors, increasing their market value.

Overall Economic Conditions - When the economy is booming, most businesses perform well, and stock markets rise. Conversely, economic crises drag down market value.

Management and Vision - Clear leadership and strategic foresight build investor confidence.

Product and Service Quality - Companies known for quality and customer satisfaction tend to maintain their market position.

Financial Liquidity - Firms with sufficient cash flow, good debt management, and strong financial structures tend to have higher market values.

Difference between Market Value and Market Price

Many people confuse the two, but they are quite different:

Market Price is the actual trading price in the market, driven by the emotions and demand of buyers and sellers. It fluctuates every minute, every second.

Market Value is an overall assessment of the enterprise’s worth, derived from systematic calculations. It’s a long-term decision-making guide for investors.

If stock prices reflect market sentiment, market value reflects the true worth of the company. Prices may fluctuate wildly, but the underlying value remains steady.

Market Value vs. Book Value - Which one to choose?

(Book Value) is the value of a company according to its accounting records, calculated as:

Book Value = Total Assets – Total Liabilities

For example, Company BBB has assets worth 500 million baht and liabilities of 250 million baht. Its book value is 250 million baht—that’s what shareholders would get if the company liquidated.

The differences between Market Value and Book Value are:

• Calculation Method - Market Value uses market prices; Book Value uses accounting figures.
• Volatility - Market Value changes constantly; Book Value only updates with new accounting entries.
• Reality Reflection - Market Value reflects market opinion; Book Value shows only accounting numbers.

Smart investors consider both, as each provides different insights.

Market Value vs. Market Cap - Are they really different?

(Market Cap) (Market Capitalization) is the total value of a company’s traded shares, indicating its overall size. For example, as of the end of 2023, Apple Inc. had a Market Cap of about 3 trillion US dollars.

Deeper differences:

• Scope - Market Value is broader; it can apply to various assets. Market Cap is specific to traded shares.
• Usage - Market Value is a general term; Market Cap is specific to companies.

In practice, Market Cap is a specific form of Market Value.

How is Market Value expressed?

Market Value mainly appears in two forms:

1. Company Market Value - Used for companies listed on stock exchanges, calculated as:

Outstanding Shares × Closing Price

2. Asset Market Value - Used for real estate, business assets, or non-traded assets. Calculation requires alternative valuation methods, such as appraisals or market analysis.

Cautions for investors

Using Market Value is not foolproof; it has limitations:

Constant Fluctuations - Market Value changes with trading activity. Stock prices can soar or plummet rapidly. Investment decisions should not be based on a single day’s value.

Incomplete Reflection - Market Value may not fully capture the company’s structure, true profitability, or hidden potential.

Only for Traded Companies - Companies not listed or traded are difficult to evaluate in terms of market value.

External Factors - Market reactions can be influenced by news or events unrelated to the company’s actual performance.

What investors should remember

Market value is a key to understanding a company’s size and market standing. Once you grasp how it’s calculated and what factors influence it, you’ll be better equipped to make informed investment decisions.

Remember, Market Value alone is not enough. It should be studied alongside Book Value, Market Price, and other financial indicators to get a clear picture before making investment commitments, especially when serious investing is involved.