Market capitalization

Market capitalization, commonly called market cap, is the market value of a publicly traded company's outstanding shares.

The New York Stock Exchange on Wall Street, the world's largest stock exchange in terms of total market capitalization of its listed companies[1]

Market capitalization is equal to the share price multiplied by the number of shares outstanding.[2][3] Since outstanding stock is bought and sold in public markets, capitalization could be used as an indicator of public opinion of a company's net worth and is a determining factor in some forms of stock valuation.

Description

Market cap only reflects the equity value of a company. A firm's choice of capital structure 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 (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.

Market capitalization is used by the investment community in ranking the size of companies, as opposed to sales or total asset figures. 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. In performing such rankings, the market capitalizations are calculated at some significant date, such as June 30 or December 31.

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.[4]

Historical estimates of world market cap

Total market capitalization of all publicly traded companies in the world from 1975 to 2020.[4]

Year World market cap
(in mil. US$)		 World market cap
(% of GDP)		 Number of listed
companies
1975 1,149,245 27.2 14,577
1980 2,525,736 29.6 17,273
1985 4,684,978 47.0 20,555
1990 9,519,107 50.8 23,732
1991 11,340,785 56.8 24,666
1992 10,819,256 50.2 24,947
1993 13,897,390 61.7 28,300
1994 14,639,924 60.9 30,290
1995 17,263,728 64.0 33,379
1996 19,806,691 72.3 35,617
1997 22,029,761 80.7 36,946
1998 24,555,201 89.6 37,928
1999 33,181,159 115.1 38,414
2000 30,925,434 101.1 39,892
2001 26,792,162 88.4 40,157
2002 22,802,792 72.7 38,894
2003 31,107,425 84.9 41,051
2004 36,540,980 89.2 38,724
2005 40,512,446 92.6 39,096
2006 50,074,966 106.1 43,104
2007 60,456,082 114.0 44,034
2008 32,418,516 56.2 43,949
2009 47,471,293 83.8 42,669
2010 54,259,518 87.3 43,427
2011 47,521,341 68.8 44,323
2012 54,503,237 78.4 43,772
2013 64,367,842 89.0 44,853
2014 67,177,254 90.3 45,743
2015 62,268,184 94.5 43,983
2016 65,117,714 97.1 43,806
2017 79,501,948 111.1 43,440
2018 68,893,044 91.9 43,554
2019 78,825,583 108.4 43,248
2020 93,686,226 134.7

Calculation

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

For example, if a company has 4 million 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.[2] The terms mega-cap and micro-cap have also since come into common use,[5][6] and nano-cap is sometimes heard. Different numbers are used by different indexes;[7] 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.

Cryptocurrencies

The term market capitalization has also been applied to cryptocurrencies in recent years.[8][9] This is in contrast to the more traditional term, money supply, used to describe the total volume of a fiat money.

See also

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. "Market Capitalization Definition". Retrieved April 2, 2013.
  3. "Financial Times Lexicon". Archived from the original on September 25, 2016. Retrieved February 19, 2013.
  4. "Market capitalization of listed domestic companies (current US$) | Data". data.worldbank.org. Retrieved September 20, 2021.
  5. "Mega Cap Definition". Retrieved April 2, 2013.
  6. "Micro Cap Definition". Retrieved April 2, 2013.
  7. "Definition of Market Capitalization". Archived from the original on October 1, 2020. Retrieved August 3, 2008.
  8. Popper, Nathaniel (September 12, 2018). "When Cryptocurrencies Fluctuate, He Uses These Tech Tools to Keep Track". The New York Times. Retrieved August 13, 2021.
  9. Vigna, Paul (January 23, 2018). "The Programmer at the Center of a $100 Billion Crypto Storm". wsj.com. Wall Street Journal. Retrieved August 13, 2021.
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