What is Market Capitalization?
Market Capitalization (Market Cap) is the most recent market value of a company’s outstanding shares. The Market Cap is equal to the current share price multiplied by the number of shares outstanding.
The investing community often uses the market capitalization value to rank companies and compare their relative sizes in a particular industry or sector. To determine a company’s market cap, simply take its current market share price and multiply the figure by the total number of shares outstanding.
Market Capitalization example calculation
Market Capitalization categories
Broadly speaking, based on market capitalization, the stock market classifies stock into various categories:
- Large Cap – Companies with a market cap above $10 billion are classified as large-cap stocks. Some examples would be Apple, Microsoft, IBM, Facebook, etc.
- Mid Cap – Companies whose market cap ranges from $1 billion to $10 billion. Mid-cap stocks, in general, are more volatile than large-cap stocks and consist more of growth-oriented stocks.
- Small Cap – Companies with a market capitalization between $250 million to $1 billion. They are high risk and high return stocks as the companies are in the growth stage. A large number of companies belong to the small-cap category.
- Micro Cap – They are the penny stocks that are relatively young. The micro-cap companies’ potential for growth and decline are of similar nature. They are not considered to be the safest investment. Hence, they require lots of research before investment.
The table below shows the Market Capitalization of selected companies as of October 2017:
|Name of the Company||Sector||Market Cap (Bn)|
|Walmart Inc.||Consumer Staples||$257.2|
|JP Morgan Chase & Co.||Financials||$337.8|
|Goldman Sachs Group||Financials||$92.8|
|US Cellular Corp.||Telecom||$3.1|
Investors can use a company’s classification and actual market capitalization value to make smart investment decisions. Generally, large-cap companies own more capital and assets than small-cap companies, and as such, are considered lower-risk investments than small-cap ones. Moreover, small-cap companies tend to show higher growth potential than their larger counterparts, and as such, are likely to provide investors with more opportunities for capital gains.
Equity value metric
It’s important to know that a company’s market capitalization is the total value of its equity only. A company’s Enterprise Value is the value of the entire business, including both equity and debt capital.
A simple example of the difference between equity value vs enterprise value is with a house. If a house is worth $1,000,000 and has a $700,000 mortgage, the equity value is $300,000. The same applies to a business. A company with a Market Cap (equity value) of $10 billion and debt of $5 billion has an Enterprise Value of $15 billion.
Learn more about enterprise value vs equity value.
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