Market capitalization (often simply market cap) is the total value of the tradable shares of a publicly traded company; it is equal to the share price times the number of shares outstanding. As outstanding stock is bought and sold in public markets, capitalization could be used as a proxy for the public opinion of a company's net worth and is a determining factor in some forms of stock valuation. Preferred shares are not included in the calculation.
The total capitalization of stock markets or economic regions may be compared to other economic indicators. The total market capitalization of all publicly traded companies in the world was US$51.2 trillion in January 2007[1] and rose as high as US$57.5 trillion in May 2008[2] before dropping below US$50 trillion in August 2008 and slightly above US$40 trillion in September 2008.[2]
Valuation
Market capitalization represents the public consensus on the value of a company's equity. In a public corporation, ownership interest is freely bought and sold through purchases and sales of stock, providing a market mechanism (price discovery), which determines the price of the company's shares. Market capitalization is defined as the share price multiplied by the number of shares in issue, providing a total value for the company's shares outstanding.
Market capitalization is the total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determining a company's size, as opposed to sales or total asset figures
If a company has 35 million shares outstanding, each with a market value of $100, the company's market capitalization is $3.5 billion (35,000,000 x $100 per share).
Many companies have a dominant shareholder, which may be a government entity, a family, or another corporation. Many stock market indices such as the S&P 500, Sensex, FTSE, DAX, Nikkei, Ibovespa, and MSCI adjust for these by calculating on a free float basis, i.e. the market capitalization that they use is the value of the publicly tradable part of the company. Thus, market capitalization is one measure of "float" i.e., share value times an equity aggregate, with free and public being others.
Note that market capitalization is based on a market estimate of a company's value, based on perceived future prospects, economic and monetary conditions. Stock prices can also be moved by speculation about changes in expectations about profits or about mergers and acquisitions.
It is possible for stock markets to get caught up in an economic bubble, like the steep rise in valuation of technology stocks in the late 1990s followed by the dot-com crash in 2000. Hype can affect any asset class, such as gold or real estate. In such events, valuations rise disproportionately to what many people would consider the fundamental value of the assets in question. In the case of stocks, this pushes up market capitalization in what might be called an "artificial" manner. Market capitalization is, therefore, only a rough measure of the true size of a market. However, it does represent the best estimate of all market participants at any point in time—bubbles are easy to spot retrospectively, but if a market participant believes a stock is overvalued, then of course they can profit from this by selling the stock (or shorting it, if they don't hold it).
Categorization of companies by capitalization
Traditionally, companies were divided into large-cap, mid-cap, and small-cap. The terms mega-cap and micro-cap have also since come into common use, and nano-cap is sometimes heard.[3] Different numbers are used by different indexes;[3][4] there is no official definition of, or full consensus agreement about, the exact cutoff values. The cutoffs may be defined as percentiles rather than in nominal dollars. The definitions expressed in nominal dollars need to be adjusted over the decades due to inflation, population change, and overall market valuation (for example, $1 billion was a large market cap in 1950, but it is not very large now), and they may be different for different countries. A rule of thumb may look like:
- Mega-cap: Over $200 billion
- Large-cap: Over $5 billion
- Mid-cap: $1 billion–$5 billion
- Small-cap: $250 million–$1 billion
- Micro-cap: Below $250 million
- Nano-cap: Below $50 million
Cap is short for capitalization, a measure by which we can classify a company's size. Big/Large caps are companies that have a market cap between $10-200 billion dollars. Mid caps range from $2 billion to $10 billion dollars. These might not be industry leaders but are well on their way to becoming one. Small caps are typically new or relatively young companies and have a market cap between $100 million to $1 billion dollars. SmallCap's track record won't be as lengthy as that of the Mid to MegaCaps. SmallCaps do present the possibility of greater capital appreciation, but at the cost of greater risk.
Related measures
Market cap reflects only the equity value of a company. It is important to note that a firm's choice of capital structure has a significant impact on how the total value of a company is allocated between equity and debt. A more comprehensive measure is enterprise value (EV), which includes debt, preferred stock, and other factors. Insurance firms use a value called the embedded value (EV).
See also
References
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