Share price is a marginal value concept (bounded between the seller's and buyer's marginal utilities) and applies only to the next share traded (or most recently traded). It does not apply to the total set (or even a large set) of shares because marginal utilities are not constant. Put another way, just because the last share of AAPL sold for $180 does not mean that selling a million more AAPL shares (even in the very next market trade) will get you $180M.
This puts definitions involving "share_price * number_of_shares" on shaky semantic ground. These include the textbook definitions of market cap and enterprise value, as well as the usual spreadsheet calculations for portfolio balance and net worth.
Take market cap for example. The market cap of a company is not really the "total value of a company's stock"... at least, not the "total extractable value". If you possessed all the shares of a company and you tried to sell all of them, you'd almost certainly end up with an amount different from the current market cap (defined as current_share_price * total_shares_outstanding) because the price would change as you sold more and more (since marginal utilities are rarely constant all the way through). Likewise, if you tried to buy all the shares of a company, you'd almost certainly end up paying something different from the current market cap.
Aside: There are frequent complaints about market cap concentration of the top N companies. But this does not necessarily mean that the total value extractable from selling all their shares is concentrated. The market cap concentration might be quite different from the concentration of extractable value; it's hard to draw meaningful real-world implications from the metric of market cap.
Similarly, calculations of my portfolio balance (and hence net worth) involve the sum of "share_price * shares_held". But it is unlikely that I'd get precisely this amount if I actually tried to sell my whole portfolio even if there were no other trades happening. I guess this is not as bad an error as market cap since my portfolio value is just a drop in the ocean and so marginal utilities of the counterparties in aggregate is probably "mostly" constant when selling the entire thing.
Market cap, enterprise value, portfolio balance are so pervasive in finance and yet their standard interpretations (as described on even Investopedia and Wikipedia) seem invalid. What am I missing?
This puts definitions involving "share_price * number_of_shares" on shaky semantic ground. These include the textbook definitions of market cap and enterprise value, as well as the usual spreadsheet calculations for portfolio balance and net worth.
Take market cap for example. The market cap of a company is not really the "total value of a company's stock"... at least, not the "total extractable value". If you possessed all the shares of a company and you tried to sell all of them, you'd almost certainly end up with an amount different from the current market cap (defined as current_share_price * total_shares_outstanding) because the price would change as you sold more and more (since marginal utilities are rarely constant all the way through). Likewise, if you tried to buy all the shares of a company, you'd almost certainly end up paying something different from the current market cap.
Aside: There are frequent complaints about market cap concentration of the top N companies. But this does not necessarily mean that the total value extractable from selling all their shares is concentrated. The market cap concentration might be quite different from the concentration of extractable value; it's hard to draw meaningful real-world implications from the metric of market cap.
Similarly, calculations of my portfolio balance (and hence net worth) involve the sum of "share_price * shares_held". But it is unlikely that I'd get precisely this amount if I actually tried to sell my whole portfolio even if there were no other trades happening. I guess this is not as bad an error as market cap since my portfolio value is just a drop in the ocean and so marginal utilities of the counterparties in aggregate is probably "mostly" constant when selling the entire thing.
Market cap, enterprise value, portfolio balance are so pervasive in finance and yet their standard interpretations (as described on even Investopedia and Wikipedia) seem invalid. What am I missing?
Statistics: Posted by djm2001 — Sat Mar 02, 2024 3:21 pm — Replies 0 — Views 44