Terms

Market Capitalization What It Means for Investors

Market Capitalization What It Means for Investors

Market capitalization, or "market cap," represents the total market value of a company’s outstanding shares of stock. Investors use this figure to determine a company’s size instead of sales or total asset value. In an acquisition, the market cap helps determine whether a takeover candidate represents a good value for the acquirer.

Market capitalization shows a company’s worth determined by the total market value of all outstanding shares. To calculate a company’s market cap, multiply the number of outstanding shares by the current market value of one share. It is used to determine a company’s size and compare its financial performance to other companies of various sizes.

Market capitalization estimates a company’s value by extrapolating what the market thinks it is worth for publicly traded companies and multiplying the share price by the number of available shares. After a company goes public, its share price is determined by supply and demand, and the market cap becomes a real-time estimate of the company’s value. The formula for market capitalization is:

Market Cap = Current Share Price * Total Number of Shares Outstanding.

An initial public offering (IPO) helps determine a company’s first market capitalization. Large-cap companies usually have a market capitalization of $10 billion or more. Mid-cap companies have a market capitalization between $2 billion and $10 billion. Small-cap companies have a market capitalization between $250 million and $2 billion. Micro-cap companies have values below $250 million.

New digital currency offerings use a different market cap formula to calculate the market cap for all authorized shares or tokens. Analysts use diluted market cap to understand potential changes to a security, token, or coin’s price. The diluted market cap formula is:

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Diluted Market Cap = Current Share Price * Total Number of Shares Authorized.

Market capitalization does not measure the equity value of a company. Only a thorough analysis of a company’s fundamentals can do that. The market cap does not determine the amount the company would cost to acquire in a merger transaction. Two factors can alter a company’s market cap: significant changes in the stock price and when a company issues or repurchases shares.

A high market cap signifies that the company has a larger presence in the market. Market cap does not affect stock prices. Market cap is often used as a baseline for analysis, and it is a quick and easy method for estimating a company’s value.

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