Meaning and definition of market capitalization
Market capitalization can be delineated as the total dollar market value of all the outstanding shares of a company. This figure is used by the investment community to determine the size of a company as contrasted to sales or total assets figures. Market capitalization is also generally referred as “market cap.”
As explained by Investopedia, the size of the company is a basic determinant of asset allocation and risk-return parameters for stocks as well as stock mutual funds. The term should not be bemused with the “capitalization” of a company, which refers to a financial statement term as the sum of a company’s shareholders’ equity and long term debt.
Calculating market capitalization
Market Capitalization is just a juggled name for a simple concept. It is the market value of outstanding shares of a company. The process of calculating the market capitalization involves multiplication of a company’s outstanding shares by the existing market price of a single share.
For example, if ABC Company was trading at $20 per share and had a million shares outstanding, then the market capitalization would be calculated as ($20 X 1 million shares) which comes to $20 million.
Types of capitalization
Although there is one set of framework for delineating the various market caps. There are certain widely set standards for every capitalization. The most important ones include:
1. Mega cap including companies with a market cap of $200 and more.
2. Big/large cap including companies featuring a market cap between $10 million-$200 billion.
3. Mid cap featuring companies with a market cap vitiating $2-$10 billion.
4. Small cap includes generally new or comparatively young companies with a market cap ranging from $300 million to $2 billion.
5. Micro cap includes penny stocks and denotes market cap between $50 million to $300 million.
6. Nano cap includes companies featuring a market cap less than $50 million.
Importance of market capitalizationIt is a general misconception that a higher stock price indicates a larger company. Stock price, might, however, misrepresent the actual worth of a company. The classification of companies into individual caps also allows investors to determine the growth vs. risk potential. Previously, the large caps have faced slower growth with lower risk. Conversely, small caps have faced higher growth potential with a higher risk level.