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Market capitalization, sometimes referred to as market cap, is the total value of a
publicly traded company
A public company is a company whose ownership is organized via shares of stock which are intended to be freely traded on a stock exchange or in over-the-counter markets. A public (publicly traded) company can be listed on a stock exchange (list ...
's
outstanding common shares owned by stockholders.
Market capitalization is equal to the
market price per common share multiplied by the number of common shares outstanding.
Since outstanding
stock is bought and sold in public markets, capitalization could be used as an
indicator
Indicator may refer to:
Biology
* Environmental indicator of environmental health (pressures, conditions and responses)
* Ecological indicator of ecosystem health (ecological processes)
* Health indicator, which is used to describe the health ...
of public opinion of a company's
net worth and is a determining factor in some forms of
stock valuation
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally, potential market prices, and thus to profit fr ...
.
Description
Market capitalization is sometimes used to rank the size of companies. It measures only the equity component of a company's
capital structure, and does not reflect management's decision as to how much
debt
Debt is an obligation that requires one party, the debtor, to pay money or other agreed-upon value to another party, the creditor. Debt is a deferred payment, or series of payments, which differentiates it from an immediate purchase. The ...
(or
leverage
Leverage or leveraged may refer to:
*Leverage (mechanics), mechanical advantage achieved by using a lever
* ''Leverage'' (album), a 2012 album by Lyriel
*Leverage (dance), a type of dance connection
*Leverage (finance), using given resources to ...
) is used to finance the firm. A more comprehensive measure of a firm's size is
enterprise value Enterprise value (EV), total enterprise value (TEV), or firm value (FV) is an economic measure reflecting the market value of a business (i.e. as distinct from market price). It is a sum of claims by all claimants: creditors (secured and unsecured) ...
(EV), which gives effect to outstanding debt, preferred stock, and other factors. For insurance firms, a value called the
embedded value
The Embedded Value (EV) of a life insurance company is the present value of future profits plus adjusted net asset value. It is a construct from the field of actuarial science which allows insurance companies to be valued.
Background
Life insura ...
(EV) has been used.
It is also used in ranking the relative size of
stock exchanges, being a measure of the sum of the market capitalizations of all companies listed on each stock exchange. The total capitalization of
stock markets or
economic regions
An economy is an area of the production, distribution and trade, as well as consumption of goods and services. In general, it is defined as a social domain that emphasize the practices, discourses, and material expressions associated with the ...
may be compared with other
economic indicator
An economic indicator is a statistic about an economic activity. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles. Economic ...
s (e.g. the
Buffett indicator
The Buffett indicator (or the Buffett metric, or the Market capitalization-to-GDP ratio) is a valuation multiple used to assess how expensive or cheap the aggregate stock market is at a given point in time. It was proposed as a metric by inve ...
). The total market capitalization of all publicly traded companies in 2020 was approximately US$93 trillion.
Historical estimates of world market cap
Total market capitalization of all publicly traded companies in the world from 1975 to 2020.
Calculation
Market cap is given by the formula
, where ''MC'' is the market capitalization, ''N'' is the number of common shares outstanding, and ''P'' is the market price per common share.
For example, if a company has 4 million common shares outstanding and the closing price per share is $20, its market capitalization is then $80 million. If the closing price per share rises to $21, the market cap becomes $84 million. If it drops to $19 per share, the market cap falls to $76 million. This is in contrast to mercantile pricing where purchase price, average price and sale price may differ due to transaction costs.
Not all of the outstanding shares trade on the open market. The number of shares trading on the open market is called the float. It is equal to or less than ''N'' because ''N'' includes shares that are restricted from trading. The
free-float market cap uses just the floating number of shares in the calculation, generally resulting in a smaller number.
Market cap terms
Traditionally, companies were divided into large-cap,
mid-cap
Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders.
Market capitalization is equal to the market price per common share multiplied by t ...
, and
small-cap
Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders.
Market capitalization is equal to the market price per common share multiplied by ...
.
The terms mega-cap and
micro-cap
Micro-Cap is a SPICE compatible analog/digital circuit simulator with an integrated schematic editor that provides an interactive sketch and simulate environment for electronics engineers. It was developed by Spectrum Software and is currently at ...
have also since come into common use, and nano-cap is sometimes heard. Different numbers are used by different indexes; 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 decades due to
inflation
In economics, inflation is an increase in the general price level of goods and services in an economy. When the general price level rises, each unit of currency buys fewer goods and services; consequently, inflation corresponds to a reduct ...
,
population
Population typically refers to the number of people in a single area, whether it be a city or town, region, country, continent, or the world. Governments typically quantify the size of the resident population within their jurisdiction using a ...
change, and overall market valuation (for example, $1 billion was a large market cap in 1950, but it is not very large now), and market caps are likely to be different country to country.
Cryptocurrencies
The term market capitalization has also been applied to
cryptocurrencies in recent years.
Unlike the
money supply
In macroeconomics, the money supply (or money stock) refers to the total volume of currency held by the public at a particular point in time. There are several ways to define "money", but standard measures usually include currency in circul ...
of a
fiat currency, a cryptocurrency market cap is denominated in some other currency.
See also
*
List of public corporations by market capitalization
The following is a list of publicly traded companies having the greatest market capitalization. In media they are described as being the most valuable companies, a reference to their market value.
Market capitalization is calculated from the shar ...
*
List of countries by stock market capitalization
The following list sorts countries by the total market capitalization of all domestic companies listed in the country, according to data from the World Bank. Market capitalization, commonly called market cap, is the market value of a publicly trad ...
*
Market price
A price is the (usually not negative) quantity of payment or compensation given by one party to another in return for goods or services. In some situations, the price of production has a different name. If the product is a "good" in the ...
*
Shares authorized
The authorised capital of a company sometimes referred to as the authorised share capital, registered capital or nominal capital, particularly in the United States) is the maximum amount of share capital that the company is authorised by its con ...
*
Treasury stock
A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ("open market" including insiders' holdings).
Stock repurchases are used as a tax efficie ...
References
External links
How to Value Assets– from the Washington State (U.S.) government web site
Year-end market capitalization by country– World Bank, 1988–2018
{{stock market
Publicly traded companies
Business terms