Understanding The Relationship Between M-Cap And GDP Ratio

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Market Capitalization when we talk about is generally per se in relation to company with stocks floated in the public for public subscription and equals the prevailing market price multiplied by the number of shares. GDP on the other hand is the gross domestic product and is representative of growth. But when the combined m-cap of all the listed stocks together is considered and divided by the GDP then it plays a crucial ratio to study the standing of the stock market.

Understanding The Relationship Between M-Cap And GDP Ratio

The lower ratio indicates that the market is still not overly priced or is in the range of heavy valuations and viceversa.

The ratio gained in popularity as the investment Guru Buffet promoted it and the simple relevance put forth explaining its usefulness is that the price for a stock other than the macro-economic factor also is attained keeping in view the company's earnings estimates and GDP that gives overall earnings figure of a country shows whether the company's growth is in line with the economy as a whole or not.

M-Cap and GDP ratio over 100% is indicative of high valuations and require cautious approach while that ranging below 50% suggest undervaluation.

In the Indian context, our major bourses are not truly representative of all the sectors of the economy and hence the figures can not be taken in isolation and can show some variance from the actual. During the 2008 crisis, the market cap to GDP ratio in India peaked above the 100% level.

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