Stock Market Value is the value of a stock or index of a market. Measurement of the value of stock/index can be made in various ways. Stock Market Value can be calculated by Market Capitalization, Book Value and Market Value.
The picture of the entire stock market can be observed only through the index. Thus, the valuation of the index would give the Stock Market Value .
Stock Market Index gives a composite idea about the relevant market. It is created through the selection of a set of stocks out of the whole array of stocks, which can represent the mood of the overall market. Stock indexes work as a source of information for the economy as a whole.
Stock Market Value can be gauged by the help of the following methods: -
• Market Capitalization Method
( a) The most common method of evaluating the S tock Market Index is the Weighted Average Market Capitalization Method . 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. In this method each of the outstanding stocks 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 stocks Of the Company)
(b) Stock 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 stocks comprising the index.
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Hence, the movement in price of a single company stock can heavily affect the value of the index. One of the very important indexes valued by using this method is Dow Jones Industrial Average.
(c) Another form of stock market valuation method is Fundamentally Weighted Index where the weights are attached to the stocks according to the fundamental factors like sales.
• Book Value
Balance Sheet of a company reflects the real fundamental worth of it. This is the Book Value of a stock.
Book value of a Stock = (Cost of the Assets of a Company) – (Accumulated Depreciation)
Theoretically, this can be stated that the total value of the assets of a company is the book value of the company.
Book Value plays a very important role in stock investment because an investor could compare the book value and the market value for judging whether it is overpriced or under priced and acts accordingly.
• Market Value
Market Value of a stock is the market-determined value of a stock where the investors' perception on the performance of the stock is reflected. But due to positive expectations and heavy speculations, market value deviates from its book value. Thus, generally the stock price in the secondary market is either over-priced or under-priced.
All the above methods of the valuation of stocks are useful in their own means but which one to use is very work specific and is a customized one. Quantification of Stock Market Value helps an investor to judge the potential of the stock and invest accordingly.
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