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From Wikipedia, the free encyclopedia

Market capitalization/capitalisation (often market cap) is a measurement of the size of a business enterprise (corporation) equal to the share price times the number of shares outstanding of a public company. As owning stock represents ownership of the company, including all its equity, capitalization could represent the public opinion of a company's net worth and is a determining factor in stock valuation. Likewise, the capitalization of stock markets or economic regions may be compared to other economic indicators. The total market capitalization of all publicly traded companies in the world was US$51.2 trillion in January 2007[1] and rose as high as US$57.5 trillion in May 2008[2] before dropping below US$50 trillion in August 2008 and slightly above US$40 trillion in September 2008.[2]

Contents

Valuation

Stock market capitalization in 2005

Market capitalization represents the public consensus on the value of a company's equity. An entirely public corporation, including all of its assets, may be freely bought and sold through purchases and sales of stock, which will determine the price of the company's shares. Its market capitalization is the share price multiplied by the number of shares in issue, providing a total value for the company's shares and thus for the company as a whole.

Many companies have a dominant shareholder, which may be a government entity, a family, or another corporation. Many stock market indices such as the S&P 500, Sensex, FTSE, DAX, Nikkei, Ibovespa, and MSCI adjust for these by calculating on a free float basis, i.e. the market capitalization they use is the value of the publicly tradable part of the company. Thus, market capitalization is one measure of "float" i.e., share value times an equity aggregate, with free and public being others.

Note that market capitalization is a market estimate of a company's value, based on perceived future prospects, economic and monetary conditions. Stock prices can also be moved by speculation about changes in expectations about profits or about mergers and acquisitions.

It is possible for stock markets to get caught up in an economic bubble, like the steep rise in valuation of technology stocks in the late 1990s followed by the dot-com crash in 2000. Speculation can affect any asset class, such as gold or real estate. In such events, valuations rise disproportionately to what many people would consider the fundamental value of the assets in question. In the case of stocks, this pushes up market capitalization in what might be called an "artificial" manner. Market capitalization is therefore only a rough measure of the true size of a market.

Categorization of companies by capitalization

Traditionally, companies are divided into large-cap, mid-cap, and small-cap. Recently people have added 'micro-cap' and 'nano-cap'. People have rules of thumb to determine category from market capitalization. These need to be adjusted over time 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 they may be different for different countries. A rule of thumb may look like:[3]

  • Mega-cap: Over $200 billion
  • Large-cap: $10 billion–$200 billion
  • Mid-cap: $2 billion–$10 billion
  • Small-cap: $300 million–$2 billion
  • Micro-cap: $50 million-$300 million[4]
  • Nano-cap: Below $50 million

Different numbers are used by different indexes; there is no official definition of or general agreement about the exact cutoffs. They also may be done by percentiles rather than fixed cutoffs.

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Simple English

Market capitalization (often market cap) is a measurement of size of a business corporation. It is equal to the price of one share of stock, times the number of shares of stock in a public company. Owning stock in a compnay is owing a part of the company. Market capitalization shows the public opinion of a company's value. The total market capitalization of all publicly traded companies in the world was US$51.2 trillion in January 2007.[1] In May 2008 to rose to US$57.5 trillion.[2] By September 2008, the market cap had dropping a little more than US$40 trillion.[2]

Contents

Valuation

Market capitalization represents the public opinion of the value of a company's equity. A public corporation, including all of its assets, may be bought and sold as stock. These purchases and sales will define the price of the company's share price. Market capitalization is the share price times by the number of shares in issue. This provides a total value for the company's shares and the value the company.

Some companies have stock that is privately owned, and not publicly traded. Many Stock markets adjust the market cap on the value of the publicly traded part of the company. In this case, market capitalization is based on the publicly traded stocks.

Note that market capitalization is a market estimate of a company's value. It is based how the public believes the company will perform in the future. There are many things that can affect the stock price. These include economic conditions and mergers and acquisitions.

Categorization of companies by capitalization

In the past, companies were separated into large-cap, mid-cap, and small-cap. New categorizes 'micro-cap' and 'nano-cap' have been added. There are general guidelines to know what category a company is in. These guidelines are adjusted over time due to changes in the market and the economy. For example, $1 billion was a large market cap in 1950 but it is not very large now.

A guideline may look like:[3]
Mega-cap Over $200 billion
Large-cap $10 billion–$200 billion
Mid-cap $1 billion–$10 billion
Small-cap $300 million–$1 billion
Micro-cap $50 million-$300 million

Different numbers are used by different stock markets. There is no official definition of the exact cutoffs. They also may be done by percentiles rather than fixed cutoffs.

Related measures

Market cap reflects only the equity value of a company. A more comprehensive measure is enterprise value (EV), which includes debt and other factors. Insurance firms use a value called the embedded value (EV).

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