Market capitalization and financial capitalization

Good morning abundance! N'di good inheritance! Do as the wise woman does. Plan, save, invest and buy.  Develop, until the field becomes a vineyard (Proverbs 31:16). Inflation is inevitable (a general increase in the price of goods and services in an economy). We either anticipate it, adapt to it or suffer from it.

1. Market capitalization

2. Financial capitalization
   

"Wealth too quickly acquired dissipates; heaped up little by little, it multiplies." (Proverbs 13:11, Semeur)

"She thinks of a field, and she buys it. With the fruit of her labor she plants a vineyard." (Proverbs 31: 16, Segond 21)

"Go to the ant, you sloth! Observe his behavior and become wise: he has no boss, no inspector, no superior; in summer, he prepares his food, during the harvest, he gathers what he needs to eat. Lazy man, how long will you lie in bed? When will you rise from your slumber? You want to doze a little, rest some more, just fold your hands and sleep? Poverty will surprise you like a prowler, and misery like an armed man" (Proverbs 6:6-11, Segond 21).

In finance, the word capitalization refers to two concepts: market capitalization or market valuation, and financial capitalization. Let's make sure we don't confuse them.

1. Market capitalization

Market capitalization or market valuation is the value of all a company's shares on the stock market. It corresponds to the total number of listed shares (shares outstanding) multiplied by the share price (the market value of a share).  As the share price is more or less unstable, so is market capitalization. Market capitalization is not the real value of a company. Market capitalization reflects investors' confidence in the company's potential, market position and management team. If the number of shares requested by buyers is higher than the number of shares offered for sale, the share price rises, and vice versa.

Historically, stock market values rise over the long term, which can lead to substantial gains for investors. Investing in the stock market over the long term mitigates the effect of day-to-day fluctuations. By buying shares on the stock market, a person becomes a shareholder in a company, helping to build up its capital (necessary for the development of its business). In return, and in the event of a profit, they receive dividends and realize a capital gain on resale.

The value of a company is an assessment of its assets and returns. If the company is listed, its asset value is calculated by deducting its debts from its stock market value and adding its liquidity (cash + assets rapidly convertible into cash). The yield value is an estimate of future profits over a given period.  Financial value can be higher than market capitalization, and vice versa.

 2. Financial capitalization

Financial compounding is a financial investment method in which interest earned in previous periods is added to the initial capital invested. Interest for the following period is calculated on the initial capital plus interest from the previous period, and so on until the end of the investment. This is known as compound interest, or the snowball effect. The snowball effect is an analogy with a small snowball rolling down a snowy slope, which becomes a large ball as the snow accumulates along the way.

Let's take the example of a sum of 10,000 euros, invested at an interest rate of 5% for 2 years or 20 years.

• After the first year, the capital amounts to 10,500 euros, i.e. 10,000 euros plus 500 euros interest (5% of 10,000 euros).

• After the second year, the capital is 11,025 euros, corresponding to 10,500 euros plus 525 euros in interest (5% of 10,500 euros).

• Over 20 years, the capital amounts to 25,533 euros

Let's take the example of an initial capital of 1,500 euros and monthly savings of 100 euros, all invested for 20 years at an annual interest rate of 5%. We assume that interest is capitalized annually.  At the end of 20 years, the final capital is 43,659 euros. Corresponding to a total of 25,500 euros in payments and 18,159 euros in interest.

🙂 Every investment method has its advantages and disadvantages. There are good stories and long nightmares. The choice is made by considering personal objectives, risk appetite, preferences and the geopolitical and climatic contexts of the country or countries concerned. I apply both methods. How about you?

** Good morning = Good morning in english

** N'di = Good morning in Ewe (Togo, Ghana, Benin)