Market capitalization
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Market capitalization/capitalisation (aka market cap or capitalized/capitalised value) is a measurement of corporate or economic size equal to the share price times the number of shares outstanding of a public company. As owning stock represents owning the company, including all its assets, 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]
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[edit] Valuation
Market capitalization represents the public consensus on the value of a company's equity. A 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.
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.
[edit] Categorization of companies by capitalization
Traditionally, companies are divided into large-cap, mid-cap, and small-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 common rule of thumb may look like:[3]
- Large-cap: $10 billion - 200 Billion
- Mid-cap: from $2 billion to $10 billion
- Small-cap: 200 mill to $2 billion
Different numbers are used by different indexes; there is no official definition of or general agreement about the exact cutoffs.
[edit] See also
- Financial ratio
- Fundamental analysis
- Growth stock
- Market price
- Market trends
- Technical analysis
- List of finance topics
- List of corporations by market capitalization
- Concentrated stock
- Free float
- Public float
- Restricted stock
- Shares authorized
- Treasury stock
[edit] References
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This article needs additional citations for verification. Please help improve this article by adding reliable references (ideally, using inline citations). Unsourced material may be challenged and removed. (January 2008) |
[edit] External links
- Market capitalization definition, explanations, and general details given in clear terms
- How to Value Assets - from the Washington State (U.S.) government web site
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