Market capitalization

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The New York Stock Exchange on Wall Street, the world's largest stock exchange in terms of total market capitalization of its listed companies New York Stock Exchange August 2017 02.jpg
The New York Stock Exchange on Wall Street, the world's largest stock exchange in terms of total market capitalization of its listed companies

Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders. [2]

Contents

Market capitalization is equal to the market price per common share multiplied by the number of common shares outstanding. [3] [4] [5]

Description

Market capitalization is sometimes used to rank the size of companies. It measures only the equity component of a company's capital structure, and does not reflect management's decision as to how much debt (or leverage) is used to finance the firm. A more comprehensive measure of a firm's size is enterprise value (EV), which gives effect to outstanding debt, preferred stock, and other factors. For insurance firms, a value called the embedded value (EV) has been used.

It is also used in ranking the relative size of stock exchanges, being a measure of the sum of the market capitalizations of all companies listed on each stock exchange. The total capitalization of stock markets or economic regions may be compared with other economic indicators (e.g. the Buffett indicator). The total market capitalization of all publicly traded companies in 2020 was approximately US$93 trillion. [6]

Historical estimates of world market cap

Total market capitalization of all publicly traded companies in the world from 1975 to 2020. [6]

YearWorld market cap
(in mil. US$)
World market cap
(% of GDP)
Number of listed
companies
19751,149,24527.214,577
19802,525,73629.617,273
19854,684,97847.020,555
19909,519,10750.823,732
199111,340,78556.824,666
199210,819,25650.224,947
199313,897,39061.728,300
199414,639,92460.930,290
199517,263,72864.033,379
199619,806,69172.335,617
199722,029,76180.736,946
199824,555,20189.637,928
199933,181,159115.138,414
200030,925,434101.139,892
200126,792,16288.440,157
200222,802,79272.738,894
200331,107,42584.941,051
200436,540,98089.238,724
200540,512,44692.639,096
200650,074,966106.143,104
200760,456,082114.044,034
200832,418,51656.243,949
200947,471,29383.842,669
201054,259,51887.343,427
201147,521,34168.844,323
201254,503,23778.443,772
201364,367,84289.044,853
201467,177,25490.345,743
201562,268,18494.543,983
201665,117,71497.143,806
201779,501,948111.143,440
201868,893,04491.943,554
201978,825,583108.443,248
202093,686,226134.7

Calculation

Market cap is given by the formula , where MC is the market capitalization, N is the number of common shares outstanding, and P is the market price per common share. [7]

For example, if a company has 4 million common shares outstanding and the closing price per share is $20, its market capitalization is then $80 million. If the closing price per share rises to $21, the market cap becomes $84 million. If it drops to $19 per share, the market cap falls to $76 million. This is in contrast to mercantile pricing where purchase price, average price and sale price may differ due to transaction costs.

Not all of the outstanding shares trade on the open market. The number of shares trading on the open market is called the float. It is equal to or less than N because N includes shares that are restricted from trading. The free-float market cap uses just the floating number of shares in the calculation, generally resulting in a smaller number.

Market cap terms

Traditionally, companies were divided into large-cap, mid-cap, and small-cap. [8] [4] The terms mega-cap and micro-cap have since come into common use, [9] [10] and nano-cap is sometimes heard. Different numbers are used by different indexes; [11] there is no official definition of, or full consensus agreement about, the exact cutoff values. The cutoffs may be defined as percentiles rather than in nominal dollars. The definitions expressed in nominal dollars need to be adjusted over decades due to inflation, population change, and overall market valuation (for example, $1 billion was a large market cap in 1950, but it is not very large now), and market caps are likely to be different country to country.

See also

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References

  1. "Market highlights for first half-year 2010" (PDF). World Federation of Exchanges. Archived from the original (PDF) on July 22, 2013. Retrieved May 29, 2013.
  2. Graham, John R; Smart, Scott B.; and Megginson, William J. (2010). Corporate Finance (third ed.). Mason OH: South-Western Cengage Learning. p. 387. ISBN   9780324782967.{{cite book}}: CS1 maint: multiple names: authors list (link)
  3. Graham, Smart and Megginson op cit p. 387.
  4. 1 2 "Market Capitalization Definition" . Retrieved April 2, 2013.
  5. "Financial Times Lexicon". Archived from the original on September 25, 2016. Retrieved February 19, 2013.
  6. 1 2 "Market capitalization of listed domestic companies (current US$) | Data". Data.WorldBank.org. Retrieved September 20, 2021.
  7. Graham, Smart and Megginson op cit p. 387.
  8. "Large Cap, Mid Cap, and Small Cap Stocks". Financial Edge. Retrieved September 15, 2022.
  9. "Mega Cap Definition" . Retrieved April 2, 2013.
  10. "Micro Cap Definition" . Retrieved April 2, 2013.
  11. "Definition of Market Capitalization". Archived from the original on October 1, 2020. Retrieved August 3, 2008.