What market cap actually counts

Which is the bigger company: one whose shares trade at KRW 50,000 or one whose shares trade at KRW 500,000? The share price alone cannot say, because the price depends on how many pieces the company is divided into.

Divide the same company into 1 million shares and each share carries a high price; divide it into 100 million shares and each share carries a low one. The company itself is unchanged; only the price of each piece differs. So comparing company size means looking at the value of all the pieces, not the price of one.

That value is market cap. It multiplies the share price by the number of shares to turn the price the market puts on the whole company into a single number. This is also why Jupick shows market cap on the stock page: two companies with the same grade should not be read as the same kind of company if one is ten times the size of the other.

The trouble is not the price being multiplied but the number it is multiplied by. There is one share price, but there is more than one share count.

The phrase number of shares can actually refer to four different numbers.

The first is shares issued: every share the company has issued to date. The second is listed shares: only those actually on the exchange and available to trade. The third is shares issued minus the treasury shares the company has repurchased and holds. The fourth is free float, which further removes shares that do not come to market, such as stakes held by controlling shareholders and the government, and counts only shares that actually change hands.

Treasury shares are a particularly confusing part. When a company repurchases its own shares, those shares lose their voting rights and dividend rights, since a company being its own shareholder means nothing. Yet until they are cancelled, they stay in the count of shares issued. A company that has piled up treasury shares looks larger by market cap measured on shares issued than the stake its shareholders actually share.

The gap between the four numbers varies by company. At a company with almost no treasury shares the four are close; at one that has accumulated treasury shares for years or has a large controlling stake, the first and the fourth clearly diverge.

The Korean market has a practice rarely seen elsewhere: a company's common and preferred shares are listed separately under different ticker codes and traded separately.

These are the stocks whose names end in a suffix meaning “preferred”. The issuer and the business are the same, but the market treats them as separate stocks, and their prices move separately. They usually carry no voting rights in exchange for a slightly higher dividend, and trade at a lower price than the common shares.

This is where market cap splits. The market cap of the common stock alone leaves out the whole portion represented by preferred shares. To know the value of the whole company, common and preferred have to be added together.

Jupick handles data stock by stock, so the market cap shown on screen is the market cap of that one stock. If the page is for a common stock, the number covers the common shares only, not the whole company. At companies with listed preferred shares, this gap can range from a few percent to more than ten percent.

Indexes such as KOSPI, Korea's main market index, and the S&P 500 are often described as weighting stocks by market cap. That is only half right. Most major indexes do not use market cap as is; they first scale it down by a free float ratio.

The reason is simple. A fund that tracks an index can only acquire shares actually available in the market. Including stakes that controlling shareholders never put up for trading would count shares no one can acquire as an amount the fund is supposed to hold.

So index providers assign each stock a free float ratio and set its weight by market cap multiplied by that ratio. A company with a large controlling stake ranks lower by index weight than by market cap.

If the market cap the exchange publishes for a company and its weight in an index seem not to match, this adjustment is usually why. Neither number is wrong; they answer different questions.

Some companies are listed on exchanges in several countries at once. A typical arrangement is listing depositary receipts in the US market separately from the shares listed in the home market.

In that case each market listing has its own market cap. But those numbers must not be added together. A depositary receipt is traded as a receipt for original shares deposited with a bank, so adding them counts the same shares twice.

How many original shares one depositary receipt represents also varies by company. One receipt equals one original share at some companies and ten at others, so converting the two markets' prices by the exchange rate alone does not line them up.

Some data sources also group several share classes by company rather than by stock. For a company with two classes of shares with different voting rights, each listed, some sources report them by class and others combine them. That difference alone can make the same company's market cap look nearly twice as large.

Comparing the size of Korean and overseas stocks in one row requires putting them in the same currency. But conversion is not free.

Convert a dollar market cap into KRW and, even on a day when the company's share price does not move at all, its KRW market cap moves with the exchange rate. Nothing happened at the company, yet its rank changes.

Which moment's exchange rate to use is also an issue. The US market opens after the Korean market closes, so lining up the two markets' market caps at the same moment is trickier than it looks.

So size comparisons that mix currencies are safest used only to gauge the rough order of magnitude. They are not suited to settling a difference of one place in the rankings.

To state it plainly: Jupick's market cap comes from different sources for Korean and overseas stocks.

For Korean stocks it is the per-stock market cap compiled by the Korea Exchange (KRX). Because it is per stock, preferred shares are counted separately, as described above, and the count is based on listed shares.

For overseas stocks it is the company-level market cap provided by an overseas market data service. For companies with several share classes this source sometimes combines them, so it cannot be said to use exactly the same definition as the Korean figures.

So comparisons among Korean stocks, or among overseas stocks, use the same ruler, but comparing market cap across Korean and overseas stocks uses slightly different rulers. The conversion problem from the previous section adds to this.

This value does not enter the grade calculation. Jupick's overall grade is built only from three areas, profitability, stability and dividends, and market cap is shown on screen for reference. But size is one of the criteria at the stage of deciding which stocks Jupick covers. So if the definition of market cap shifts, whether stocks near the threshold of the list are included can shift too.

Market cap is safest read as an order of magnitude. For gauging whether a company is in the trillions of KRW or the tens of trillions, any definition gives the same conclusion.

On the other hand, arguing over which of two stocks with similar market caps is slightly larger is not advisable. A difference that small is lost in definitional differences or in a single day of exchange rate movement.

On the page of a stock whose name ends in the suffix meaning “preferred”, the first thing to confirm is that the number covers the preferred shares only, not the whole company.

If a market cap seen elsewhere differs from Jupick's number, it is usually one of three things: a different share count, company level versus stock level, or a different conversion moment. Matching which definition each uses is quicker than arguing which one is right.

Market cap is share price times share count. There is one share price, but the share count splits into issued, listed, excluding treasury shares, and free float, so one company can have several market caps.

In Korea there is the added factor that preferred shares are listed separately. A per-stock market cap is the number for that stock only, not the whole company.

Indexes use values scaled down by a free float ratio, simple addition does not hold for companies listed in several markets, and when currencies differ, rankings move even if nothing happens at the company.

Jupick uses market caps from different sources for Korean and overseas stocks. Within one market they are measured with the same ruler, but comparisons across markets are best trusted only to the order of magnitude.

This content is for information only and is not investment advice. Jupick gives no trading advice on any stock and does not forecast the future direction of prices. Investment decisions and responsibility for them rest with the user.