Share Market Value

By: EconomyWatch   Date: 23 November 2010

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Share Market Value is not the value of a specific share of a company. Rather it depicts the value of the whole market. The picture of the entire share market can be observed only through the index. Thus, the valuation of the index would give the Share Market Value.

Share Market Index gives a composite idea about the relevant market. It is created through the selection of a set of shares out of the whole array of stocks which can represent the mood of the overall market. Share indexes work as a source of information for the economy as a whole.

The most common method of valuating the Share Market Index is the Weighted Average Market Capitalization Method. In this method each of the outstanding shares comprising the index are attached with a weight in accordance with its market capitalization.

Market Capitalization of a Company = (Stock Price) x (Total Number of Outstanding Shares Of the Company)

Market Capitalization measures the value of the company. This helps to categorize different companies into various sizes such as large-cap, mid-cap and small-cap where cap signifies capitalization.

Now, let us take an example to elucidate the weight attachment technique in Weighted Average Market Capitalization Method. Suppose that the market capitalization of all the stocks in an index is 10 million dollars. Now, if the market capitalization of a particular stock is 1 million dollar then the weight to be attached with that stock is 1% of the index.

Share Market Valuation can also be done through Price weighted Index. Here, the valuation of a certain index is done by considering the price of the company shares comprising the index. Hence, the movement in price of a single company share can heavily affect the value of the index. One of the very important index valued by using this method is Dow Jones Industrial Average.

Another form of share market valuation method is Fundamentally Weighted Index where the weights are attached to the shares according to the fundamental factors like sales.

Thus we can see that share market value is an average where weights are attached to the outstanding shares according to different methods used. Share market value works as a good signal to the investors for gauging the health of the share market in particular and of the domestic economy in general.




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