Market capitalization (often market cap) is a measurement of the size of a business enterprise (corporation) equal to the share price times the number of shares outstanding (shares that have been authorized, issued, and purchased by investors) of a publicly traded company. As owning stock represents ownership of the company, including all its equity, capitalization could represent the public opinion of a company’s net worth and is a determining factor in some forms of stock valuation. Likewise, the capitalization of stock markets or economic regions may be compared to 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.
Valuation
Market capitalization represents the public consensus on the value of a company’s equity. An entirely public corporation, including all of its assets, may be freely bought and sold through purchases and sales of stock, which will determine the price of the company’s shares. Its market capitalization is the share price multiplied by the number of shares in issue, providing a total value for the company’s shares and thus for the company as a whole.
Many companies have a dominant shareholder, which may be a government entity, a family, or another corporation. Many stock market indices such as the S&P 500, Sensex, FTSE, DAX, Nikkei,Ibovespa, and MSCI adjust for these by calculating on a free float basis, i.e. the market capitalization they use is the value of the publicly tradable part of the company. Thus, market capitalization is one measure of "float" i.e., share value times an equity aggregate, with free and public being others.
Note that market capitalization is a market estimate of a company’s value, based on perceived future prospects, economic and monetary conditions. Stock prices can also be moved by speculationabout changes in expectations about profits or about mergers and acquisitions.
It is possible for stock markets to get caught up in an economic bubble, like the steep rise in valuation of technology stocks in the late 1990s followed by the dot-com crash in 2000. Hype can affect any asset class, such as gold or real estate. In such events, valuations rise disproportionately to what many people would consider the fundamental value of the assets in question. In the case of stocks, this pushes up market capitalization in what might be called an "artificial" manner. Market capitalization is therefore only a rough measure of the true size of a market. However it does represent the best estimate of all market participants at any point in time – bubbles are easy to spot retrospectively, but if a market participant believes a stock is overvalued, then of course they can profit from this by selling the stock (or shorting it, if they don’t hold it).
Categorization of companies by capitalization
Traditionally, companies were divided into large-cap, mid-cap, and small-cap. The terms mega-cap and micro-cap have also since come into common use, and nano-cap is sometimes heard.Different numbers are used by different indexes; there is no official definition of, or full consensus agreement about, the exact cutoff values. The cutoffs may be defined as percentiles rather than innominal dollars. The definitions expressed in nominal dollars need to be adjusted over the decades due to inflation, population change, and overall market valuation (for example, $1 billion was a large market cap in 1950, but it is not very large now), and they may be different for different countries. A rule of thumb may look like:
- Mega-cap: Over $200 billion
- Large-cap: Over $5 billion
- Mid-cap: $1 billion–$5 billion
- Small-cap: $250 million–$1 billion
- Micro-cap: Below $250 Million
- Nano-cap: Below $50 million
Cap is short for capitalization which is a measure by which we can classify a company’s size. Big/Large caps are companies that have a market cap between 10-200 billion dollars. Mid caps range from 2 billion to 10 billion dollars. These might not be industry leaders but are well on their way to becoming one. Small caps are typically new or relatively young companies and have a market cap between 100 million to 1 billion dollars. SmallCap’s track record won’t be as lengthy as that of the Mid to MegaCaps. SmallCaps do present the possibility of greater capital appreciation, but at the cost of greater risk.