- On 2 August Apple became the first US-listed company to reach a value of one trillion dollars.
- Market value reflects what investors are willing to pay at a given moment, not what the company earned or what it will be worth tomorrow.
- A milestone like this is a reason to check what is really in the portfolio and how much depends on a few names, not to chase the headline.
On 2 August 2018, Apple became the first US-listed company to reach a market value of one trillion dollars. The figure, hard to imagine, went round the world and became a symbol of the weight that the big technology companies had acquired in financial markets and in the daily lives of millions of people.
A headline like that has something of a spectacle about it, but it also contains useful information for anyone managing wealth or running a company. It speaks of how value is distributed in the economy, of how far a few names influence stock indices and of how much confidence investors have placed in the future of certain businesses. Understanding what that figure really means helps avoid being carried away by the excitement of a record. A record figure says nothing about whether an investment is good or bad for any particular person; it only reports what others are willing to pay.
What a company’s value means
Market value, or capitalisation, is the price of a share multiplied by the number of shares. It reflects what investors are willing to pay for the company at a given moment, not what it earned last year or what it will be worth tomorrow.
That is why it changes every day, and sometimes every minute. If investors become more optimistic about future results, the price rises and with it the capitalisation; if they become more cautious, the opposite happens. It is not money the company holds in a vault, but a collective estimate of its value, and that estimate can change quickly with a piece of news, a set of results or a shift in general mood. That is why capitalisation is a thermometer of the moment rather than a measure of soundness.
Concentration and expectations
That a single company can reach such a figure shows the growing weight of the big technology companies in stock indices. It also means that the results of a few companies can strongly influence the course of an index and, with it, the portfolios that depend on it.
Someone who invests through index funds or index-linked products may unknowingly have a considerable part of their money in a handful of companies. That concentration is not a problem in itself while things go well, but it means a stumble in those names would have a disproportionate effect. Knowing how much they weigh in the portfolio is a first step towards deciding whether that level of dependence is the one wanted. Fund prospectuses and periodic reports usually detail their main holdings, and consulting them takes only a few minutes.
A matter of diversification
For an investor, such milestones are not an invitation to buy or sell, but a reason to check what is really inside the portfolio and how much depends on a few names. A portfolio diversified across sectors, geographies and asset types spreads risk better, and an adviser can help review its make-up.
Diversification does not consist of accumulating many products, but of ensuring that those held do not depend on the same factors. Two different funds may be investing in the same companies, and then the diversification is only apparent. The same happens when several products respond to the same factor, such as one sector, one currency or one region. Reviewing the make-up periodically, with the help of an independent adviser and with an eye on the family’s objectives and time horizons, avoids discovering too late that the risk was more concentrated than it seemed.
Record figures are an invitation to look at the make-up of the portfolio, not to chase the headline.
This article is general information. It is not legal, tax or investment advice, and it does not take anyone’s particular circumstances into account.
