Stock Market Capitalization to GDP Ratio – Definition

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Stock Market Capitalization-to-GDP Ratio

The stock market capitalization-to-GDP ratio is a ratio that measures the overall value of all publicly traded stock in a market in comparison to the country’s gross domestic product (GDP). This ration is otherwise called the Buffett Indicator, it is the stock market cap to the GDP of a country. Essentially, the market cap to GDP ratio helps to determine whether a market is overvalued or undervalued, compared to the historical average.

The stock market capitalization-to-GDP ratio is calculated as the total value of the market (stock in a market) divided by the country’s GDP. The following formula is used to calculate the market capitalization-to-GDP ratio;

Market Capitalization to GDP = GDP / Stock Market Capitalization ×100

A Little More on What is Stock Market Capitalization-to-GDP Ratio

Warren Buffett, a renowned investor popularized the stock market capitalization-to-GDP ratio. This ratio can be used for specific markets or used as a broad metric to assess the global market. The ratio is simply calculated as a stock market cap divided by a country’s gross domestic product. According to Warren Buffet, the stock market capitalization-to-GDP ratio was “probably the best single measure of where valuations stand at any given moment.” The ratio indicates the percentage of a country’s GDP that the stock market cap represents.

A stock market capitalization-to-GDP ratio that is greater than 100% indicates that the market is overvalued, while a ratio of 50% shows undervaluation. In cases where the ratio is between 50 and 75%, the market moderately undervalued. A fair valuation of the stock market is achieved if the ratio is between 75 and 90%, while a ratio of 90 and 115% shows that the market is moderately overvalued.

The broad assessment of the global market using the stock market capitalization-to-GDP ratio is done by the World Bank. The annual data released by the World Bank as of 2015 shoes that the stock market capitalization-to-GDP ratio for the world was 55.2% which indicates that the global market was modestly undervalued.

• The stock market capitalization-to-GDP ratio is a ratio that measures the percentage of a country’s gross domestic product (GDP) that the stock market represents.
• This ratio measures the total value of all publicly traded stock in comparison to the GDP.
• This ratio is otherwise called the Buffett Indicator as it was popularized by Warren Buffet, a renowned investor.
• Through the stock market capitalization-to-GDP ratio, analysts can determine whether an overall market is undervalued or overvalued compared to a historical average.
• A ratio between 50 and 75% indicates that the market is modestly undervalued, while a ratio between 90 and 115% shows that the market is modestly overvalued. Also, a ratio greater than 100% indicates that a market is overvalued, while a ratio of 50% shows that the market is undervalued.

References for “Stock Market Capitalization To GDP Ratio”

https://www.investopedia.com/terms/m/marketcapgdp.asp

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