What is Market capitalisation?
If you want to know how much a firm is worth according to the stock exchange, then you need market capitalisation = the total market value of all outstanding shares.
The importance of a market cap is that it clearly shows the size of a company. It is the very first factor that investors pay attention to. It identifies various characteristics, including risks. For example, Perry the Platypus LLC issues 30 million shares and sells them at $ 100 a share, hence its capitalisation of $ 3 billion. And another corporation, Doofenshmirtz Evil Inc, is selling every share for $ 1,000, so it will only have a mart cap of $ 10 million after it sells 10,000 shares.
Initially, the market capital of a company is established through an initial public offering (IPO). Before that, the firm turns to an investment bank to determine how many shares will be put up for sale and at what cost. For example, the IPO value of Phineas and Ferb Inc is set by the bank at $ 100 million. They decide to issue 10 million shares at $ 10 per share or issue 20 million at $ 5 per share. In both cases, the initial capitalisation will be $ 100 million.
So the firm went public and started trading on the stock exchange. Now its price depends on supply and demand in the stock exchange. High demand = price increase. If sellers of shares don’t see the firm’s growth potential as promising, then they can reduce the price. So, what is a market cap? Ultimately, market cap meaning is a real-time estimate of the value of a company.
And now in more detail.
Calculating market cap
Everything is simple:
Market cap of a stock = the number of outstanding shares X the current market value of one share.
Also, you should know that market capitalisation rate is the expected return on a security and capitalisation rate = a property’s net operating income : the current market value (you will find out about MV a little bit later).
And equity market capitalisation measures the total value of the entire equity mart. To find this value, you need to add up all the individual mart caps of all the businesses that are available on the stock mart. Thus, you will receive the capitalisation of the entire mart.
Market capitalisation categories
MC (yo!) will help you diversify your portfolio with businesses of different sizes.
Typically, the large market cap (also known as ‘good market cap’) firms is $ 10 billion or more. These may be time-tested corporations that have an excellent reputation. They may not generate huge profits in a short amount of time, but they reward their investors with constant increases in share value and dividend payments. These are corporations such as IBM, Johnson & Johnson, and Microsoft.
From 2 to 10 billion dollars – this is the MC of mid-cap companies. These are firms that are established in their industries and are in the process of rapid growth or expect it. This is how they attract investors. This stage can determine whether this business will be able to realize its potential in the future. But mid-caps aren’t only about growing stocks. These can be firms with a narrow focus that don’t have great growth prospects, or with a large capitalisation, but they have declined for some reason, for example, more competitors have appeared or there has been some kind of disruption in the industry.
Small-cap companies – firms with a total market cap of $ 300 million to $ 2 billion. These are either young businesses or they operate in niches and new industries. That is why it is risky to invest in them. But if you are willing to wait and live through fluctuations in stock prices, then these firms can offer significant upside potential for long-term investors.
So, there are three types of market cap size. Just remember it.
Frequently Asked Questions about market capitalisation
We make it through the market capitalisation analysis, but you still have questions?
You can always read some information in our Help centre or ask a question in the chat. But here are a couple of answers.
How does market capitalisation increase?
Firms can increase their MC in two ways:
- Increase the market value of the stock;
- Introducing new shares.
Is Market Cap the same as market value?
Mart capitalisation and market value in finance vary greatly in terms of calculations and accuracy. As you already know, MC is calculated by multiplying the number of shares outstanding by the current price of a single share. At the same time, MV is calculated using many indicators such as price-to-earnings, price-to-sales, and return-on-equity. In fact, MV means the MV of a company’s equity, not its overall MV.
And also there is a full market cap, which includes all of the shares provided by a company through its stock capitalisation issuance plan.
What is the use of Market capitalisation?
Mart cap helps to understand the structure of a company and how much it earns, so you can find out the value of the stock.
What company has the largest market capitalisation in the world?
In July 2021, the company with the largest MC in the world is Apple (no surprise) with a capmarket of over $ 2.4 trillion.
Now you know how to find market cap, how many types of mart caps are there and much more.