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Understanding Market Capitalization: Why Expensive Stocks Don’t Always Mean Stronger Companies

Discover the truth about stock prices and market capitalization. Learn why the most expensive share per unit doesn’t always represent the most valuable or profitable company in the stock market.

What is Market Capitalization?

Market capitalization, or market cap, refers to the total market value of a company’s outstanding shares. It is calculated by multiplying the stock price per share with the number of outstanding shares. This metric gives investors a clear picture of how valuable a company is in the eyes of the market.

Price Per Share vs Market Cap

Many beginners often assume that the company with the highest share price is automatically the most expensive. However, that’s not entirely true. The value of a company depends not only on its stock price but also on how many shares are circulating in the market.

Example: Indonesia’s Top Banks (May 2022)

• Bank BCA (BBCA) – Price per share: Rp7,400 – Market Cap: Rp903 trillion
• Bank BRI (BBRI) – Market Cap: Rp665 trillion
• Bank Mandiri (BMRI) – Market Cap: Rp370 trillion
• Bank BNI (BBNI) – Market Cap: Rp164 trillion
• Bank Jago (ARTO) – Market Cap: Rp115 trillion

From this data, even though BNI had a higher price per share than BRI, its market cap was smaller. This proves that price per share alone is misleading.

Why Market Cap Matters

Market cap helps investors understand the overall size and weight of a company in the stock market. It’s also a useful tool when comparing companies in the same industry. Still, market cap alone is not enough—you need to look at financial performance too.

Comparing Profitability

For instance, in 2021:

• BCA earned a net profit of Rp31.4 trillion
• BRI earned Rp31 trillion
• Mandiri earned Rp28.0 trillion
• BNI earned Rp10.9 trillion
• Bank Jago earned only Rp0.08 trillion

This shows that a high market cap does not guarantee strong profits. Bank Jago once had a market cap of Rp261 trillion in early 2022, but its profit was far lower compared to BNI. On the other hand, BNI had a much smaller market cap but generated over 100x more profit than Bank Jago.

“The most expensive company isn’t always the most profitable. In the long run, stock prices follow company fundamentals.”

Practical Lesson for Investors

If you had Rp200 trillion in 2022, would you buy 100% of Bank Jago or Bank BNI? On paper, Bank Jago looked trendy and digital, but BNI produced significantly more profit with a much lower market cap. This highlights why investors should analyze fundamentals, not just hype.

Key Takeaways

• Stock price per share does not define whether a company is expensive.
• Market capitalization provides a clearer picture of company value.
• High market cap does not always mean better performance.
• Investment decisions should focus on fundamentals and profitability.

Conclusion

Market capitalization is an essential concept for anyone entering the world of investing. Understanding how it works prevents beginners from making costly mistakes, like judging companies solely based on share price. Always remember: investing in stocks means buying a business. Choose companies with solid fundamentals and sustainable profits, not just expensive-looking share prices.

If you found this article helpful, feel free to share it, leave a comment, or explore other financial guides on this blog for deeper insights.

Label:

Finance

References

• NoteGPT_ (19).txt – Training Material
• IDX Indonesia Stock Exchange – Official Website