Market capitalization

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Market capitalization, often abbreviated to market cap, is a business term that refers to the aggregate value of a firm's outstanding common shares. In essence, market capitalization reflects the total value of a firm's equity currently available on the market. This measure differs from equity value to the extent that a firm has outstanding stock options or other securities convertible to common shares. The size and growth of a firm's market capitalization is often one of the critical measurements of a public company's success or failure. However, market capitalization may increase or decrease for reasons unrelated to performance such as acquisitions, divestitures and stock repurchases.

Market capitalization is calculated by multiplying the number of outstanding common shares of the firm and the current price of those shares. The term capitalization is sometimes used as a synonym of market capitalization; more often, it denotes the total amount of funds used to finance a firm's balance sheet and is calculated as market capitalization plus debt (book or market value) plus preferred stock.

The total market capitalization of all the companies listed on the New York Stock Exchange is greater than the amount of money in the United States.

Valuation

Main article: business valuation

Market capitalization is a function of the price of a firm's stock and may not accurately reflect intrinsic value because of varying future expectations held by investors. It is common for a firm's market capitalization to exceed "book value" (shareholders' equity) because market prices tend to increase at a quicker pace than earnings accumulate due to value placed on expected future growth. For instance, in the late 1990s the shares of Internet-related companies were highly valued by the market, and tiny companies with almost no sales (but high growth) generated market capitalizations in the billions of dollars.

"Float"

The amount of shares available on the open market, the "float" (or "free float") is sometimes less than the total number of shares because a portion of the outstanding shares may be held by "insiders," and/or by the company as treasury stock. In addition to the float being perhaps much smaller than the total number of shares, a significant portion of the float may be owned by large institutional investors who rarely trade. As a result, on any given trading day, generally only a small percentage of shares is traded, as in the example of Yahoo!, about 1.5% (20,025,727/1,180,000,000).

The sudden availability on the open market of all of a company's stock, as a result of both the insiders and the company selling all shares held, could cause a plummet in the stock price (if unexpected and not already priced in by the market).

Categorization of companies by market cap

In the U.S. companies and stocks are often categorized by market cap values as follows (figures given are approximate):

  • Small-cap: a company whose market cap is less than $500 million
  • Mid-cap: a company whose market cap is between $500 million and $1 billion
  • Large-cap: a company whose market cap exceeds $1 billion

In contrast to the definitions above, there is much discussion about what represents a "small cap" firm with little in the way of hard and fast rules. For instance, many investors view the Russell 2000 index (the 2nd and 3rd deciles of public companies when measured by market capitalization) as a proxy for "small cap", and the largest firm in the Russell 2000 is over $2 billion in market cap.

Less used are the following terms:

  • Micro-cap: a company whose market cap is less than $300 million
  • Nano-cap: a company whose market cap is less than $50 million
  • Mega-cap: a company whose market cap exceeds $200 billion

Blue chip is used as a synonym for large-cap.

Examples

Examples of share valuation compared to market cap (price), and share ownership, from Yahoo! Inc. ([1], [2])

Valuation measures

Share statistics

Levels

Main article: Equity levels and flows

Stock market capitalisation 2003 (compared with GDP converted to € through estimated purchasing power parity exchange rates)

  • EU: €6.0 trillion (59% of PPP GDP)
  • Japan: €2.4 trillion (75% of PPP GDP)
  • United States: €10.7 trillion (108% of PPP GDP)

See also

Lists

External links

Data

de:Marktkapitalisierung id:Kapitalisasi pasar ru:Рыночная капитализация