In this article, we will get to know about Market Capitalization – Calculator – Formula. Market capitalization is the company’s aggregate value based on the current share price and the total number of stocks outstanding. It is calculated by combining the current market price of the stock of the company with the company’s total outstanding shares.
One of the most important features that allow the investor to assess the returns and the risk in the share is the market capitalization. It also allows investors to select stocks that can meet their expectations for risk and diversification.
Market Capitalization – Calculator – Formula
What Is Market Capitalization?
The overall market value of a business measured in dollar amounts is market capitalization or ‘market capitalization.’ Since it represents a company’s “market” value, it is measured on the basis of the current market price (CMP) of its shares and the total number of shares outstanding, or the “float” of the company.
In order to identify and categorize the size of companies among investors and analysts, market capitalization is often used.
- Market capitalization is the gross dollar value at the present market price of all of a company’s outstanding securities.
- Market capitalization is used to size and appreciate the net market value of companies.
- Depending on their market capitalization, businesses can be classified as big-, mid-, or small-cap.
- Blue-chip firms are mostly portfolios with large caps or mega-caps, whereas micro-caps are referred to as the very smallest.
Market Capitalization Calculation
Market capitalization is calculated by multiplying the outstanding shares of the company by the current market price of one share. Since the company is represented by an X number of shares, the multiplication of the X value per share represents the total dollar value of the company. Outstanding shares refer to the shares of the company currently held by all of its shareholders, including share blocks held by institutional investors and limited shares owned by the company’s officers and insiders.
Text [Market Capitalization] = text [Price Per Share] times text [Shares Outstanding]
Market Cap= Price Per Share × Shares Outstanding
Market capitalization formula
The calculation of market capitalization is pretty straightforward. Its formula consists of two elements:
- The current price of a single share
- Number of outstanding shares of a company
Market capitalization = price of share * number of outstanding shares
Different Types of Capitalization
Since capitalization is a dollar sum that can vary greatly (from a few thousand dollars to more than a trillion dollars), there are different buckets and related nomenclatures to categorize the various levels of market caps. The widely used criteria for each capitalization are below:
This group covers firms that have a $200 billion or higher market value. They are, by market value, the largest publicly traded firms, and usually represent the leaders of a specific sector or market. For this group, a restricted number of firms apply. As of Sept 2020, for example, technology leader Apple Inc. (APPLE) has a market value of $1,965 trillion, while Amazon Inc. (AMZN), an online shopping giant, was next with $1,60 trillion.
Companies have a market value of between $10 billion and $200 billion in this segment. There is a $108.41 billion market cap for International Business Machines Corp. (IBM) and a $54.27 billion figure for General Electric Co. (GE).
Blue chips are referred to as both mega and large-cap stocks and are perceived to be relatively stable and secure. However, like all firms are subject to market uncertainties, there is no guarantee that these companies can retain their stable valuations. E.g., GE’s valuation has tanked by almost 30 percent over the last one-year period ending Sept 2019, whereas that of Apple has risen by about 105 percent.
This group of companies is known to be more volatile than large-cap and mega-cap companies, ranging from $2 billion to $10 billion in market cap value. A significant portion of the mid-caps represents growth stocks. Any of the firms may not be giants of the industry, but they may be on their way to being one. Juniper Networks Inc. (JNPR), with a $7.29 billion market value, is 1.5 billion.
Small-cap businesses have a $300 million to $2 billion market cap. Although the majority of this group is made up of relatively young companies that may have exciting growth potential, the list also contains a few proven old companies that may have lost value for a number of reasons in recent times. Bed Bath & Beyond Inc. is one example. (BBBY), which has a market cap of 1.87 billion. These companies’ track records are not as long as those of the mid-to-mega-caps offer the prospect of higher capital growth at the expense of higher risk.
This group consists primarily of penny stocks and denotes firms with market capitalizations ranging from $50 million to $300 million. For example, limited valuations and limits may be reported for a lesser-known pharmaceutical company with no marketable product and working on developing a medication for an incurable condition, or a 5-person small company working on artificial intelligence (AI)-powered robotic technology. While such businesses’ upward potential is high if they succeed in reaching the bull’s eye, if they totally crash, the downside potential is equally worse. Investments in such businesses should not be for the faint-hearted as they do not provide the safest investment, and before entering into such a role, a great deal of research should be undertaken.
Nano-caps are referred to as companies with market caps below $50 million, providing another high-risk, high-reward layer above the micro-caps. These businesses are considered to be the riskiest lot, and the potential for profit varies widely. Currently, on the OTCBB or pink sheets, these stocks exchange.
Historical research shows that with lower risk, mega-and large-caps often experience slower growth, while small-caps have higher growth potential but are at higher risk. Based on the shift in their market cap valuations on a regular basis, it is common to see businesses make changes from one group to the other. Such common investments, such as mutual funds and exchange-traded funds (ETFs), are often listed as small-cap, mid-cap, or large-cap companies alongside companies. In the case of funds, the words represent the types of stocks in which the fund invests primarily.
Importance of Market Capitalization
Some traders and investors, often novices, can mistake the price of a stock to be a precise representation of the value, health, and/or stability of that business. They can interpret a higher stock price as a measure of the stability of a company or a lower price as a bargain investment available. The stock price alone does not reflect the actual value of a company. The correct metric to look at is market capitalization, as it reflects the real value as viewed by the overall market.
For example, as of October 10, 2018, Microsoft had a market cap of $814 billion with a stock price of $101.16 per share, while IBM, with a higher stock price of $142.69, had a lower market cap of $130 billion. It would not provide a true reflection of their real relative values to equate the two firms by simply looking at their stock prices.
With a value worth billions of dollars, a large-cap corporation may have more scope to spend a few hundred million in a new market stream and may not take a big hit if the venture fails. However, if their venture fails and they do not have the greater buffer to withstand the loss, a mid-cap or micro-cap business making a similar value investment could be vulnerable to major blows. If the venture is successful for large-cap businesses, their profit numbers will seem small. But it can contribute to profits of greater magnitudes if the business scales up with its growth. The success of such projects for a mid-cap firm, on the other hand, can strengthen its valuations to significant heights.
All by itself, a high stock price doesn’t always mean a stable or growing sector. A relatively small market capitalization could still be available.
Mid-cap or small-cap business valuations often hit when there are rumors of a large-cap corporation invading their product or service space. For example, under the Amazon Web Services (AWS) umbrella, Amazon’s entrance into cloud hosting services poses a major challenge to smaller companies operating in the niche space.
In general, mega-cap or large-cap stock investments are perceived to be more conservative with less volatility than small-cap stock investments. While mid-cap and small-cap stocks give risk-taking investors a high return opportunity, the comparatively limited capital available to them makes their stocks more vulnerable to competition, uncertainties, and market or economic downturns.
Market capitalization values are also the basis for a number of market indices to be introduced. For example, the S&P 500 index’s benchmark share index contains the top 500 U.S. companies that are weighted based on their market cap value, while the FTSE 100 index includes the top 100 companies with the largest market capitalization listed on the London Stock Exchange. These indexes not only represent the overall trends and feelings of the market but are also used as indices to monitor the performance of different funds, portfolios, and individual investments.
Size does matter, applies to the world of investment. Understanding the concept of market capitalization is important not only for the individual stock investor but also for investors of different funds. The market cap can help the investor know where they’re putting their hard-earned money.
Understanding things like a market cap is an important part of investing, but one of the first real steps is to set up a brokerage investment account. Choosing a broker can be slightly intimidating in terms of price range and variety of features.