What is Market Capitalization?
How Does Market Capitalization Work?
The formula for market capitalization is:
Market Capitalization = Current Stock Price x Outstanding
It is important to note that market capitalization (sometimes called "market cap") is not the same as equity value, nor is it equal to a company's debt plus its shareholders' equity (although that is sometimes referred to as simply the company's capitalization).
Let's assume Company XYZ has 10,000,000x $9 = $90 million.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 10,000,000
Why Does Market Capitalization Matter?
Market capitalization reflects the theoretical cost of buying all of a company's shares, but usually is not what the company could be purchased for in a normal merger transaction. To estimate what it would cost for an investor to buy a company outright, the enterprise value calculation is more appropriate.
Thus market capitalization is a better measure of size than worth. That is, market capitalization is not the same as market value, which can generally only be assigned when the company is actually sold.
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