Market capitalization
Market capitalization is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price
Share price
A share price is the price of a single share of a number of saleable stocks of a company. Once the stock is purchased, the owner becomes a shareholder of the company that issued the share.-Behavior of share prices:...

 times the number of shares outstanding
Shares outstanding
Shares outstanding are common shares that have been authorized, issued, and purchased by investors. They have voting rights and represent ownership in the corporation by the person or institution that holds the shares. They should be distinguished from treasury shares, which is common stock held by...

 (shares that have been authorized, issued, and purchased by investors) of a publicly traded company. As outstanding stock
Share (finance)
A joint stock company divides its capital into units of equal denomination. Each unit is called a share. These units are offered for sale to raise capital. This is termed as issuing shares. A person who buys share/shares of the company is called a shareholder, and by acquiring share or shares in...

 is bought and sold in public markets, capitalization could be used as a proxy for the public opinion of a company's net worth
Net worth
In business, net worth is the total assets minus total outside liabilities of an individual or a company. For a company, this is called shareholders' preference and may be referred to as book value. Net worth is stated as at a particular year in time...

 and is a determining factor in some forms of stock valuation
Stock valuation
In financial markets, stock valuation is the method of calculating theoretical values of companies and their stocks. The main use of these methods is to predict future market prices, or more generally potential market prices, and thus to profit from price movement – stocks that are judged...


The total capitalization of stock market
Stock market
A stock market or equity market is a public entity for the trading of company stock and derivatives at an agreed price; these are securities listed on a stock exchange as well as those only traded privately.The size of the world stock market was estimated at about $36.6 trillion...

s or economic regions
Macroeconomics is a branch of economics dealing with the performance, structure, behavior, and decision-making of the whole economy. This includes a national, regional, or global economy...

 may be compared to other economic indicator
Economic indicator
An economic indicator is a statistic about the economy. Economic indicators allow analysis of economic performance and predictions of future performance. One application of economic indicators is the study of business cycles....

s. The total market capitalization of all publicly traded companies in the world was US$51.2 trillion in January 2007 and rose as high as US$57.5 trillion in May 2008 name="">WFE Report Generator including report for Domestic Market Capitalization 2008 (World Federation of Exchanges
World Federation of Exchanges
The World Federation of Exchanges , formerly FIBV - Federation Internationale des Bourses de Valeurs , is an international organization for securities and derivative markets such as stock exchanges....

) before dropping below US$50 trillion in August 2008 and slightly above US$40 trillion in September 2008.


Market capitalization represents the public consensus on the value of a company's equity. In a public corporation, ownership interest is freely bought and sold through purchases and sales of stock, providing a market mechanism which determines the price of the company's shares. Market capitalization is defined as the share price multiplied by the number of shares in issue, providing a total value for the company's shares outstanding.

Many companies have a dominant shareholder, which may be a government entity, a family, or another corporation. Many stock market indices
Stock market index
A stock market index is a method of measuring a section of the stock market. Many indices are cited by news or financial services firms and are used as benchmarks, to measure the performance of portfolios such as mutual funds....

 such as the S&P 500
S&P 500
The S&P 500 is a free-float capitalization-weighted index published since 1957 of the prices of 500 large-cap common stocks actively traded in the United States. The stocks included in the S&P 500 are those of large publicly held companies that trade on either of the two largest American stock...

, Sensex
BSE Sensex
The Bombay Stock Exchange SENSEX also referred to as BSE 30 is a free-float market capitalization-weighted stock market index of 30 well-established and financially sound companies listed on Bombay Stock Exchange...

FTSE 100 Index
The FTSE 100 Index, also called FTSE 100, FTSE, or, informally, the footsie , is a share index of the 100 most highly capitalised UK companies listed on the London Stock Exchange....

The DAX is a blue chip stock market index consisting of the 30 major German companies trading on the Frankfurt Stock Exchange. Prices are taken from the electronic Xetra trading system...

, Nikkei
Nikkei 225
The , more commonly called the Nikkei, the Nikkei index, or the Nikkei Stock Average , is a stock market index for the Tokyo Stock Exchange . It has been calculated daily by the Nihon Keizai Shimbun newspaper since 1950. It is a price-weighted average , and the components are reviewed once a year...

, 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 based on 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
In finance, speculation is a financial action that does not promise safety of the initial investment along with the return on the principal sum...

 about changes in expectations about profits or about mergers and acquisitions
Mergers and acquisitions
Mergers and acquisitions refers to the aspect of corporate strategy, corporate finance and management dealing with the buying, selling, dividing and combining of different companies and similar entities that can help an enterprise grow rapidly in its sector or location of origin, or a new field or...


It is possible for stock markets to get caught up in an economic bubble
Economic bubble
An economic bubble is "trade in high volumes at prices that are considerably at variance with intrinsic values"...

, like the steep rise in valuation of technology stocks in the late 1990s followed by the dot-com crash
Dot-com bubble
The dot-com bubble was a speculative bubble covering roughly 1995–2000 during which stock markets in industrialized nations saw their equity value rise rapidly from growth in the more...

 in 2000. Hype can affect any asset class, such as gold
Gold is a chemical element with the symbol Au and an atomic number of 79. Gold is a dense, soft, shiny, malleable and ductile metal. Pure gold has a bright yellow color and luster traditionally considered attractive, which it maintains without oxidizing in air or water. Chemically, gold is a...

 or real estate
Real estate
In general use, esp. North American, 'real estate' is taken to mean "Property consisting of land and the buildings on it, along with its natural resources such as crops, minerals, or water; immovable property of this nature; an interest vested in this; an item of real property; buildings or...

. 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. However it does represent the best estimate of all market participants at any point in time - bubbles are easy to spot retrospectively, but if a market participant believes a stock is overvalued, then of course they can profit from this by selling the stock (or shorting it, if they don't hold it).

Categorization of companies by capitalization

Traditionally, companies were divided into large-cap, mid-cap, and small-cap. The terms mega-cap and micro-cap have also since come into common use, and nano-cap is sometimes heard. Different numbers are used by different indexes; 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 the 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 they may be different for different countries. A rule of thumb may look like:
  • Mega-cap: Over $200 billion
  • Large-cap: Over $5 billion
  • Mid-cap: $1 billion–$5 billion
  • Small-cap: $250 million–$1 billion
  • Micro-cap: Below $250 Million
  • Nano-cap: Below $50 million

Cap is short for capitalization which is a measure by which we can classify a company's size.
Big/Large caps are companies that have a market cap between 10-200 billion dollars.
Mid caps range from 2 billion to 10 billion dollars. These might not be industry leaders but are well on their way to becoming one.
Small caps are typically new or relatively young companies and have a market cap between 100 million to 1 billion dollars.
SmallCap's track record won't be as lengthy as that of the Mid to MegaCaps. SmallCaps do present the possibility of greater capital appreciation, but at the cost of greater risk.

Related measures

Market cap reflects only the equity value of a company. It is important to note that a firm's choice of capital structure
Capital structure
In finance, capital structure refers to the way a corporation finances its assets through some combination of equity, debt, or hybrid securities. A firm's capital structure is then the composition or 'structure' of its liabilities. For example, a firm that sells $20 billion in equity and $80...

 has a significant impact on how the total value of a company is allocated between equity and debt. A more comprehensive measure is enterprise value
Enterprise value
Enterprise value , Total enterprise value , or Firm value is an economic measure reflecting the market value of a whole business. It is a sum of claims of all the security-holders: debtholders, preferred shareholders, minority shareholders, common equity holders, and others...

 (EV), which includes debt and other factors.
Insurance firms use a value called the embedded value
Embedded value
The Embedded Value of a life insurance company is the present value of future profits plus adjusted net asset value. It is a construct from the field of actuarial science which allows insurance companies to be valued.-Background:...


See also

  • Financial ratio
    Financial ratio
    A financial ratio is a relative magnitude of two selected numerical values taken from an enterprise's financial statements. Often used in accounting, there are many standard ratios used to try to evaluate the overall financial condition of a corporation or other organization...

  • Free float
  • List of finance topics
  • List of corporations by market capitalization
  • Market price
    Market price
    In economics, market price is the economic price for which a good or service is offered in the marketplace. It is of interest mainly in the study of microeconomics...

  • Market trends
    Market trends
    A market trend is a putative tendency of a financial market to move in a particular direction over time. These trends are classified as secular for long time frames, primary for medium time frames, and secondary for short time frames...

  • Public float
    Public float
    The float of a company whose stock is publicly traded has different default meanings depending on the presumed context.Without a qualifier it may refer to the entire market capitalization of the company or only its publicly traded equity....

  • Shares authorized
    Shares authorized
    Shares authorized is the maximum number of shares that a company can issue. This number is specified in the company's articles of association but can be changed by shareholders' approval...

  • Treasury stock
    Treasury stock
    A treasury stock or reacquired stock is stock which is bought back by the issuing company, reducing the amount of outstanding stock on the open market ....

External links

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