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Trading Terms

Market Share: What it is and How to Calculate it

Market Share: Stock market chart showing market share.

What is market share?

Market share is a term that is thrown around a lot in the business world, but what does it actually mean? In simple terms, it refers to the percentage of total sales within a particular industry that is controlled by a company or product. But behind this seemingly straightforward concept lies a complex and fascinating landscape of competition, strategy, and consumer behavior. Understanding it is essential for businesses looking to stay ahead of the curve and dominate their respective markets.

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To better understand market share, imagine this: There are two companies selling cars and one sells twice as many as the other, so in terms of market share, this would mean the former has a 67% market share (two-thirds of the total sales), while the latter has a 33% market share (one-third of the total sales).

  • Investors use market share as a key metric to evaluate a company's growth potential and the quality of its management team. A company with a high market share is generally seen as having a strong competitive position and may be more likely to continue growing in the future. Conversely, a company with a low market share may face challenges in attracting customers and growing its business.
  • Investors also compare a company's market share with that of its competitors to evaluate its relative position in the market. A company with a higher market share than its competitors is generally seen as having a competitive advantage and may be more likely to generate higher profits and returns for investors.

How is market share measured?

The formula for calculating market share by sales is:

Market Share = Total Company Sales / Total Industry Sales

To use this formula, you need to know the total sales of both the company and the industry in which it operates over a specific period of time (it could be quarterly, yearly or multiple years).

Total company sales refer to the total revenue generated by the company from all its products or services during a specified period.

Total industry sales refer to the total revenue generated by all companies in the industry during the same period.

Once you have these two figures, you can divide the total company sales by the total industry sales to get the company's market share.

For example, if a company generates $10 million in sales in a market with total industry sales of $50 million, its market share would be:

Market Share = $10 million / $50 million = 0.2 or 20%

This means that the company captures 20% of the total sales in that market.

This information can be useful for investors, as it helps them evaluate a company's competitive position and growth potential within its industry.

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What is the difference between market share and market size?

Both are important metrics used in analyzing markets, but they represent different concepts.

  1. Market size refers to the total value or volume of sales in a specific market, often expressed in terms of currency, units sold, or some other measure of volume. It is a measure of the overall size of the market and does not take into account the share of individual companies within that market.
  2. Market share, as explained above, refers to the percentage of total sales in a specific market that a particular company or brand controls. It is a measure of a company's relative position within the market compared to its competitors.

In other words, market size provides a picture of the total demand for a product or service in a given market, while market share provides insight into the level of competition within that market and the success of individual companies in capturing a portion of that demand.

For example, the market size for smartphones in a particular region may be $10 billion in annual sales. If a company has a market share of 20%, it means that they capture $2 billion in sales of smartphones in that region. While the market size gives an overall picture of the smartphone market in that region, market share provides insight into the performance of individual companies operating in that market.

What affects market share?

  1. Product quality: Companies that produce high-quality products tend to have higher market shares than those that produce lower-quality products.
  2. Brand reputation: Companies with strong brand reputations tend to have higher market shares because consumers trust their products more.
  3. Pricing strategy: Companies that offer lower prices than their competitors may be able to gain market share because consumers are attracted to the lower prices.
  4. Marketing and advertising: Companies that invest in marketing and advertising tend to have higher market shares because they are able to reach a larger audience and increase awareness of their products.
  5. Distribution channels: Companies that have strong distribution networks and are able to get their products into more retail stores and online marketplaces tend to have higher market shares.
  6. Innovation: Companies that are able to introduce new and innovative products to the market tend to have higher market shares because consumers are often drawn to new and unique products.

Market share vs share price

Both market share and share price are used to measure a company's performance in the stock market But how do they differ?

Market share Share price
Refers to the percentage of total sales within a particular industry that is generated by a particular company or product. Refers to the price at which a company's stock is traded in the stock market.
It is a measure of a company's competitive position in the market. It is determined by the supply and demand for the company's shares in the market, and reflects the perceived value of the company by investors.
A high market share suggests that a company is a leader in its industry, which may lead to higher revenues, profitability, and brand recognition. Share price can be influenced by a variety of factors, including the company's financial performance, growth prospects, management, industry trends, and investor sentiment.

You might also be interested in: Market capitalization explained: a beginner's guide

Market share: An example

Apple Inc: The most recent statistics on smartphone sales in the United States, as of December 2022, reveal that Apple Inc commands a substantial share of the market, accounting for 55.79%. This means that Apple manufactures more than half of all smartphones sold in the country, making it the top smartphone manufacturer.

Compared to its closest competitor, Samsung, Apple's market share is significantly higher. Samsung's market share stands at 29.85%, which is a 25.94 percentage point difference from Apple's market share.

In the United States, Apple and Samsung hold a large market share compared to other smartphone manufacturers. The combined market shares of Apple and Samsung amount to 85.64%, which means that over 80% of smartphones sold in the country are either Apple or Samsung devices.

Motorola holds the third position in terms of smartphone market share, accounting for 4.92%, while Google and LG follow with market shares of 2.17% and 1.82%, respectively. The total market share of these three manufacturers amounts to 8.91%, which is about one-sixth of Apple's market share.

The bottom line

Understanding market share is crucial for developing effective marketing strategies and making informed business decisions. By continuously monitoring and analyzing market share data, businesses can stay ahead of their competitors and identify areas for improvement.

If you're a business owner, make sure to regularly analyze your market share data to understand your position in the market and identify opportunities for growth. By doing so, you'll be able to make informed business decisions and stay ahead of your competitors.

This article is offered for general information and does not constitute investment advice. Please be informed that currently, Skilling is only offering CFDs.

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