Fully Diluted Market Cap: Understanding the Concept and Significance in Crypto Investing

Item: Fully Diluted Market Cap: Understanding the Concept and Significance in Crypto Investing
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Comprehensive Guide to Fully Diluted Market Cap: Definition, Calculation, and Analysis for Investors

By Komeil Tabaar Last updated Jul 29, 2023 0

By reading the article “Fully Diluted Market Cap” published in Adaas Investment Magazine, you will be fully familiar with the meaning of the term “Fully Diluted Market Cap” in the financial markets! This level of familiarity can be enough when you need educational information about this topic.

What does fully diluted market capitalization mean? Fully diluted market capitalization (FDMC) refers to the value of equity at which a company’s shares would trade if all convertible securities were converted into common shares and the resulting common stock was then traded on an open market such as the New York Stock Exchange (NYSE). This can be confusing to understand, especially when we also throw in terms like equity dilution, basic/fully diluted earnings per share, and fully diluted shares outstanding into the mix.

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What Does Fully Diluted Market Cap Mean

If you have taken an introductory finance class, you may be familiar with market capitalization. A company’s market capitalization, commonly known as market cap, is calculated by multiplying its current stock price by its number of shares outstanding.

For example, if a company has 1 million shares and its stock trades at $100 per share, its market capitalization would be $100 million ($100 x 1 million = $100 million). The bigger a company gets – which usually means that more people are buying shares in it – the higher its market cap is likely to be.

The Importance of Fully Diluted Market Cap

While there are many different measures of a company’s value, one of the most popular is fully diluted market capitalization. In addition to using other metrics such as EBITDA (Earnings before Interest, Taxes, Depreciation, and Amortization), most companies are also often valued according to their current stock price as well as their fully diluted market capitalization.

The fully diluted part means that it includes all of a company’s outstanding shares, including options, warrants, and convertible debt instruments. The fully diluted market cap is calculated by multiplying a company’s stock price by its total number of outstanding shares (including those held by employees or in treasury). This figure can be used for comparison purposes with other publicly traded companies in order to determine whether or not an investment would be profitable.

For example, if Company A has 10 million shares outstanding at $10 per share while Company B has 1 million shares outstanding at $20 per share, then Company A has a higher fully diluted market cap than Company B because it has more potential upside potential.

Does market cap matter in crypto?

With crypto and blockchain still a very new industry, it can be difficult to understand how market cap affects different cryptocurrencies. So what is market capitalization (also known as market cap or MCap)? In short, it refers to a cryptocurrency’s current price multiplied by its total circulating supply.

The higher a coin’s market cap is relative to another, typically means that its price will increase over time when compared to that of other coins in circulation with lower market caps.

Is a high fully diluted market cap good?

A high fully diluted market cap is good. And it is better to invest in high fully diluted market cap companies than in LOW or MEDIUM fully diluted market cap companies. Because, if you are investing for the short term, you should prefer HIGH fully diluted market cap companies over LOW and MEDIUM ones.

However, if you are investing for the long term, then it does not matter whether you invest in a HIGH fully diluted market cap company or in any other company because all will give the same return after a few years.

So, we can say that the FULLY DILUTED MARKET CAP (FDMC) of a company is an important factor while investing for the short term but it does not matter much while investing for the long term as FDMC of all companies will be the same after a few years.

How to Calculate Fully Diluted Market Cap

While it’s tempting to look at a stock’s market capitalization (the number of outstanding shares multiplied by the price per share) and use it as your valuation metric, it’s important to remember that most companies have issued more shares than they have outstanding. This is called dilution.

For example, let’s say ABC Inc. has 10 million shares outstanding with a market cap of $100 million and another million shares are held in company escrow for employee stock options (in other words, these aren’t currently tradeable but will be issued later). If an additional 1 million options were exercised and sold today, those new 1 million shares would dilute the stock by bringing its fully diluted market cap down to about $90M.

What’s the difference between a market cap and a fully diluted market cap?

The market capitalization of a company is calculated by multiplying its current share price by all outstanding shares. However, when calculating fully diluted market cap, total outstanding shares are adjusted to reflect potential dilution from convertible securities and warrants.

Fully diluted market cap gives you a better picture of what investors are willing to pay for a given company. In general, companies with higher fully diluted market caps tend to have more growth potential than those with smaller fully diluted market caps.

The End Words

At Adaas Capital, we hope that by reading this article you will be fully immersed in the meaning of the term “Fully Diluted Market Cap” in the financial markets! You can help us improve by sharing this post which is published in Adaas Investment Magazine and help optimize it by submitting your comments.