Market capitalization (or market cap) is a measure of the value of a company or stock. It is calculated by multiplying the number of outstanding shares (or marketable securities) by the current price per share. Market capitalization is used to gauge the size of a company and its influence in the stock market.
The formula for calculating a company’s or stock’s market capitalization is as follows:
Market Capitalization = Number of Outstanding Shares x Price per Share
For example, assuming that Company X has 1,000,000 outstanding shares, and its current price per share is 50, then its market capitalization would be (1,000,000 x \50) = $50,000,000.
When comparing companies of different sizes, market capitalization is often presented as a ratio. To calculate this ratio, take the market cap of the company you want to compare and divide it by the market cap of a company with similar characteristics.
Market capitalization represents the general size of a company as it is the total value of all shares. It can tell investors whether a company is growing or shrinking in comparison to similar companies. Market cap can provide investors with insight into the direction in which a company’s share price may be moving.
Investors often use market capitalization as a measure of risk when making investment decisions. Generally speaking, higher market capitalization companies are considered to be less risky than their lower market capitalization counterparts. This is because larger companies generally have greater access to or control of resources, including cash flow and earnings. They often have higher liquidity as well, which makes it less likely for an investor to lose money.
The market capitalization of a company is also affected by other factors, such as the company’s ability to generate revenue and profits, market sentiment, and even broader economic factors. Because of these factors, the market cap of a company will change over time.
Market capitalization (or market cap) is a measure of the value of a company or stock, calculated by multiplying the number of outstanding shares by the current price per share.
Market value is the current price of a company’s stock plus all of its liabilities. Market value does not take into consideration any of the company’s assets, such as cash, accounts receivable, inventory, etc.
Enterprise value (or EV) is a measure of the market value of the entire company, taking into consideration all of its assets and liabilities. EV gives investors a more complete picture of the company’s value than either market capitalization or market value.
Market capitalization is used by investors to determine the level of risk associated with a particular company or stock. Generally speaking, larger companies with a higher market capitalization offer more stability and less risk than their smaller counterparts.
Generally speaking, we can use the following classification for stocks depending on their market capitalization:
- Large-cap stocks ($10 billion or more)
- Mid-cap stocks ($2 billion to $10 billion)
- Small-cap stocks (< $2 billion)