DEFINITION of Market capitalization (market cap)
Market capitalization (market cap) represents the total value of its outstanding shares on the market.
This is the market value of a publicly traded company’s outstanding shares.
WHAT IT IS IN ESSENCE
Market capitalization is equal to the share price multiplied by the number of outstanding shares. The outstanding stock is buying and selling in public markets. Hence, capitalization is a valid indicator of public opinion of a company’s net worth.
And, hence, market capitalization (market cap) is a deciding factor stock valuation at some point.
Investment community can use market capitalization in ranking the size of companies. In contrast to sales or total asset figures.
Also, in ranking the relative size of stock exchanges. It is a measure of the sum of the market capitalizations of all companies on each stock exchange.
The total capitalization of stock markets or economic regions is comparable with other economic indicators.
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. Before dropping below US$50 trillion in August 2008.
And slightly above US$40 trillion in September 2008. In 2014 and 2015, global market capitalization was US$68 trillion and US$67 trillion, respectively.
HOW TO USE
Investors tend to split stocks into categories based on their market caps: large-cap, mid-cap, and small-cap.
The terms mega-cap and micro-cap have also since come into common use and as well as nano-cap. The boundaries between these categories often vary.
Different numbers are used by different indexes, there is no official definition of, or full consensus agreement about, the exact cutoff values.
Market cap reflects only the equity value of a company.
It is important to remember. Choice of the capital structure is significantly impacting how the overall value of a company is allocated between equity and debt.
A more comprehensive measure is enterprise value (EV). That gives effect to outstanding debt, preferred stock, and other factors.
For insurance firms, for example, a term the embedded value (EV) is in use.