General Question

mikey7183's avatar

If a public company has a $15 million market cap, does that mean they have $15 million dollars to spend/invest?

Asked by mikey7183 (338points) July 17th, 2008
Observing members: 0 Composing members: 0

6 Answers

marinelife's avatar

The answer is no.

Here is the definition:

“Definition of: market cap

(market CAPitalization) The sum derived from the current stock price per share times the total number of shares outstanding. Although the market cap of a company is an indication of the value of the company, it is only a temporary metric based on the current stock market. The true value of the company (its profits, product positioning, balance sheet, etc.) may not be reflected in the market cap. Of course, the perfect example occurred during the dot-com explosion of the late 1990s, when the market caps of many companies that never made a dime in profit rose to astronomical heights. Conversely, a company can be doing well, but still have a low market cap if its products and reputation have not caught the fancy of the masses.”

mikey7183's avatar

so then why does a company sell stock if it can’t use/spend the funds it raises by selling the stock to grow the company?

jrpowell's avatar

They can. I’m not sure why you think that they couldn’t.

La_chica_gomela's avatar

what happens is, say there is a privately owned company, let’s say a restaurant. the owner, sarah, is doing a really good business. she has a bunch of different restaurants in 8 different states, and they’re making a lot of money. she wants to open even more restaurants, but she doesn’t have the money to do it as fast as she wants. so she decides to take the company public. when this happens, it has, what is called an “initial public offering” usually referred to as an “IPO”. say, (just for easy math) that they decide to offer 100 shares at a price of $2 each. their market capitalization at this point is $200. say all the shares are bought. the company now has $200 to open new locations that it didnt have before. say the stock price increases to $3 per share. keep in mind there are still only 100 total shares. they have not had a stock split, or anything like that. now their market capitalization is $300, however, the company has not gained any more money for itself. the people who bought it at the IPO, and later sold it earned that extra dollar.

does it make sense now?

chaosrob's avatar

The money raised by making stock available to the market (the float) is available to the business for their own use. The investors who buy the stock are taking a risk, in that there’s no guarantee that the value of the stock they bought will climb.

The investor’s reward for taking that risk is that they get to keep any value above what they originally “loaned” the company by buying it’s stock. They make a profit on their “loan,” and the business has capital with which to grow. As long as things keep going well and the stock’s value climbs, everyone’s happy.

marinelife's avatar

Except the employees who never get a raise, because short-sighted American companies are too focused on return for investors to the exclusion of everything else.

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