The Basics of Market Capitalization

Market capitalization is a measure that is used to illustrate the potential value of a company. Market capitalization is commonly used by individual investors and analysts alike. Here are the basics of market capitalization and why it is an important concept. 

Market Capitalization

Market capitalization is a concept that is used to describe the current market value of the outstanding shares of a company. If you add up the value of all of the different shares of stock that are on the market, this is going to tell you the market capitalization of a company. This essentially is telling you how much a company is worth. The formula to calculate market capitalization involves multiplying the price per share by the number of shares in the marketplace. For example, let's say that a company had  1 million shares outstanding and the price per share was $10. In this example, you would simply take 1 million and multiply it by $10. The market capitalization for that company would be $10 million.

Why It is Important

By looking at the market capitalization of the company, you can get a good idea of what a company is worth. Many investors mistakenly believe that you can look at the price that a particular stock is trading at in order to determine how much the company is worth. For example, if you saw company that was trading at $50 per share, you might think that it is a more valuable company than one that is trading at $25 per share. However, if you look at the market capitalization of the two companies, you are going to be able to get a much more accurate picture. For example, let's say that a company that is trading at $50 per share has 10 million shares outstanding in the market place. This means that they would have a market capitalization of $500 million. Let's also say that the company that is trading at $25 per share has 30 million shares outstanding. This would mean that the company's market capitalization would be $750 million. The second company would actually be more valuable even though their stock price is trading at a lower amount. You have to take into consideration how many shares are available on the market instead of just looking at the price of the stock.

Different Types of Capitalization

If you spend any amount of time investing, there is a good chance that you are going to hear about the different types of market capitalization that are available in the market. For example, there are small-cap companies, mid-cap companies, and large-cap companies. These represent different sizes of market capitalization. With a small-cap company, you are looking at a market capitalization of somewhere between $300 million and $2 billion. If you have a mid-cap company, you have a company that has a market capitalization of somewhere between $2 billion and $10 billion. Large-cap companies have market capitalization between $10 billion and $200 billion.

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