Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Market Capitalization

What it is:

Market capitalization refers to the value of a company's outstanding shares. The formula for market capitalization is:

Market Capitalization = Current Stock Price x Shares Outstanding

How it works (Example):

Let's assume Company XYZ has 10,000,000 shares outstanding and the current share price is $9. Based on this information and the formula above, we can calculate that Company XYZ's market capitalization is $90 million (10,000,000 x $9 = $90 million).

Companies with less than $1 billion of market cap are generally regarded as small-cap companies. Large-cap companies usually have at least $8 billion of market cap. Companies in between are mid-cap companies.

Why it Matters:

Market capitalization reflects the theoretical cost of buying all of a company's shares, but usually is not what the company would be purchased for in a normal merger transaction.

Thus market capitalization is a better measure of size than worth. This is why market capitalization is not the same as market value, which represents how much someone would actually be willing to pay for an asset (in this case, the entire company).