Market capitalisation-to-GDP ratio
Also called: Buffett indicator · Topic: Financial Markets, Instruments, Insurance and Pensions · NCERT: Beyond NCERT
Meaning
This ratio compares the total value of all listed companies with the size of the economy.
Market cap-to-GDP ratio = Total market capitalisation ÷ GDP × 100
Market capitalisation is share price × number of shares outstanding, added up across all listed companies. A very high ratio may mean share prices have run ahead of the real economy, so markets may be over-valued. A low ratio may mean they are under-valued. It is also called the "Buffett indicator", after the investor Warren Buffett, who made it popular.
Example
Suppose all listed Indian companies are together worth Rs 400 lakh crore and GDP is Rs 300 lakh crore. The ratio is 400 ÷ 300 × 100 ≈ 133%. This means the stock market is worth more than one year's output of the whole economy.
Don't confuse with
- Price-to-earnings (P/E) ratio: compares a share's price with the company's profits. The market cap-to-GDP ratio compares the whole market with the whole economy.
Related concepts
- Secondary market
- Depository
- Demat account
- Clearing corporation
- T+1 settlement
- Algorithmic trading
- Circuit breaker
- Sensex
- Nifty 50
- Market capitalisation