What is Market Capitalization?
Market capitalization, which we also refer to as market cap, is the total value of shares that a public company issues. We calculate it by multiplying the number of shares outstanding by the price per share. In other words, all a company’s shares times the price of each share.
Shares outstanding are all the financial assets or shares of a corporation that have been authorized, issued and bought by investors. Shares outstanding also includes the shares that investors hold.
Market cap is one of the main factors in determining stock valuation. It also determines investors’ perception of how much a company is worth. However, it is not a factor we use in calculating net sales or total asset figures.
Market capitalization is an indicator of the returns for a particular company’s stock. It is also a risk indicator. Subsequently, investors often use it as a tool to help pick stocks. Specifically, it helps investors pick stocks that can meet their risk level and diversification goals.
We refer to the stocks of large companies as large-cap and those of medium companies as mid-cap. So, logically, we refer to those of small companies as small cap.
Approximate categories of market capitalization:
- Large Cap: at least $5 billion. However, some people and institutions have a higher threshold.
- Mid Cap: between $2 billion to $5 billion
- Small Cap: less than $2 billion
We refer to the shares of large-cap companies as large capitalization stocks. We also call them large-cap stocks.
Example of market capitalization
Let’s suppose, for example, that John Doe Inc. has 40 million shares outstanding. Each share is worth $50. Therefore, John Doe’s market capitalization is $2 billion, i.e., 40,000,000 x $50 per share.
Some investors, however, claim that a more comprehensive measure of a company’s net value is enterprise value (EV). EV accounts for factors such as debt and preferred stock. It also takes into account total cash and cash equivalents.
Market capitalization of public companies
Market capitalization can also refer to the total value of shares in a stock market. Additionally, we sometimes use the term for the value of shares in a country, region, and even the world.
The global stock market’s capitalization was $69 trillion in 2014. It represented nearly 24%, i.e., nearly one quarter, of the world’s financial asset value.
Video – Understanding Market Capitalization
As this Wall Street Survivor video explains, market cap gives investors an idea of how big a company is. It also helps investors compare companies when they are considering options.