“This stock is only ¥5 — so cheap; that one is ¥1,700 — way too expensive.” That’s the beginner’s most natural intuition, and also the most wrong one. This article redefines “expensive” and “cheap” using share capital and market cap — and along the way resolves another confusion: why a stock can suddenly “crash 30%” one day while your account loses nothing at all.
Share capital: how many slices the company is cut into
A listed company is divided equally into some number of shares; that total is the total shares outstanding. But not all of them can necessarily trade on the market. There are layers:
- Free-float shares: the portion currently tradable on the exchange.
- Restricted shares: the temporarily locked-up portion — pre-IPO shareholders’ stakes have 12–36 month lock-ups, and shares from private placements have lock-ups too. When the lock-up expires (“unlocking”), they become free float.
Unlockings are events worth watching: a batch of extremely low-cost shares suddenly gains the right to sell, supply increases, and the price often comes under pressure. Market apps let you look up each stock’s future unlock schedule.
The denominator of the turnover-rate formula (Part 1) is precisely the free float — only the tradable portion can change hands, so that’s the only base that makes the measure meaningful.
Market cap: the price tag on the whole company
- Total market cap = share price × total shares
- Free-float market cap = share price × free-float shares
Now we can fix the opening intuition. The share price is the price of “one slice”; market cap is the price of “the whole thing.” A ¥5 stock with 100 billion shares outstanding has a market cap of ¥500 billion — a giant. Kweichow Moutai at ¥1,700 has only 1.256 billion shares outstanding, so its market cap is a perfectly sensible number for its actual size. To judge whether a stock is “big or small,” look at market cap; to judge “expensive or cheap,” you need the valuation metrics of the next article — the share price alone tells you nothing.
Rule-of-thumb market-cap tiers (A-share usage, not an official standard):
- < ¥10 billion: small cap, high volatility, easily pushed around by capital flows;
- ¥10–50 billion: mid cap;
- > ¥100 billion: large cap, index heavyweight, steadier trend but less elasticity.
Within the same index, a large cap falling 1% requires real selling pressure, while a small cap can fall 5% on a whiff of sentiment — that’s the origin of the “light boat / heavy boat” way of talking about stock size.
Ex-rights and ex-dividend: that “crash” one morning
One morning at the open, a stock you hold suddenly goes from ¥20 to ¥10, showing a -50% drop — don’t faint; check your account: your share count went from 1,000 to 2,000. This is a 10-for-10 bonus issue (or 10-for-10 reserve conversion): the company split every share into two.
The key fact: your total assets haven’t changed by a single cent. 2,000 shares × ¥10 = 1,000 shares × ¥20. Different way of slicing the cake, same cake. This day is called the ex-rights date (for bonus/conversion shares) or the ex-dividend date (for cash dividends):
- Cash dividend: ¥1 paid per share; on the ex-dividend date the opening reference price is automatically reduced by ¥1. Your stock’s market value drops by ¥1 per share while your cash rises by ¥1 per share — still just a transfer. (Details and taxes in Part 6.)
- Bonus/conversion shares: X shares granted per 10 held; the price is scaled down proportionally so that total market value stays constant.
“Bonus” and “conversion” differ in accounting source (bonus shares come from retained earnings, conversion shares from capital reserves), but the result for investors is the same: more shares, lower price per share, unchanged total.
Price adjustment: making historical candlesticks comparable
Ex-rights/ex-dividend creates a problem: historical prices now have a “cliff” — 20 yesterday, 10 today, but that -50% isn’t a real loss. Computing returns, drawing moving averages, or running backtests on such data is all wrong. The fix is price adjustment （复权）: adjust historical prices for splits and dividends to erase the cliffs. Market apps offer three options in the candlestick settings:
- Forward-adjusted: anchored on today’s price, adjusting history backward. Today’s price is the real price; the further back in history, the lower the adjusted values. Use this for looking at charts, drawing moving averages, and everyday analysis — the default recommendation.
- Backward-adjusted: anchored on the listing day’s price, adjusting subsequent prices upward. It shows “if you held from day one, reinvesting all dividends and splits, how much each share would be worth now” — use it to measure true long-term returns. Many stocks with backward-adjusted prices in the thousands are the real picture of long-term holding.
- Unadjusted: raw prices, cliffs preserved. Only used to check actual historical trade prices (e.g., verifying a trade from back in the day).
One-sentence memory aid: forward-adjusted for charts, backward-adjusted for the total ledger, unadjusted for archaeology. And the first discipline of quantitative backtesting is confirming which kind of adjusted data your source provides — backtest on unadjusted data and your strategy will “discover” nonexistent crashes on every ex-date.
Chain reactions: how share structure distorts other metrics
- Around an unlock, the free-float market cap jumps, and the turnover rate’s measuring basis changes with it;
- Big bonus issues are often used to “lower the share price” and manufacture an illusion of cheapness — after a 10-for-10, ¥50 becomes ¥25 with zero change in the company, but retail investors feel it’s “affordable” now. This play was hyped to a frenzy in 2015–2016 and only cooled after regulators cracked down;
- Market cap directly determines index weight: the CSI 300 is weighted by free-float market cap, so the bigger the company, the bigger its influence on the index — that’s the principle behind the phrase “propping up the index via heavyweight stocks.”
Next article moves into valuation: P/E, P/B, P/S, dividend yield — quantitative answers to “is this company worth its market cap?”
This article explains terminology only and does not constitute investment advice.