Market capitalization

Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company's outstanding common shares owned by stockholders.^[2]

Market capitalization is equal to the market price per common share multiplied by the number of common shares outstanding.^[3]^[4]^[5]

Description

Market capitalization is sometimes used to rank the size of companies. It measures only the equity component of a company's capital structure, and does not reflect management's decision as to how much debt (or leverage) is used to finance the firm. A more comprehensive measure of a firm's size is enterprise value (EV), which gives effect to outstanding debt, preferred stock, and other factors. For insurance firms, a value called the embedded value (EV) has been used.

It is also used in ranking the relative size of stock exchanges, being a measure of the sum of the market capitalizations of all companies listed on each stock exchange. The total capitalization of stock markets or economic regions may be compared with other economic indicators (e.g. the Buffett indicator). The total market capitalization of all publicly traded companies in 2020 was approximately US$93 trillion.^[6]

Historical estimates of world market cap

Total market capitalization of all publicly traded companies in the world from 1975 to 2020.^[6]

Year	World market cap (in mil. US$)	World market cap (% of GDP)	Number of listed companies
1975	1,149,245	27.2	14,577
1980	2,525,736	29.6	17,273
1985	4,684,978	47.0	20,555
1990	9,519,107	50.8	23,732
1991	11,340,785	56.8	24,666
1992	10,819,256	50.2	24,947
1993	13,897,390	61.7	28,300
1994	14,639,924	60.9	30,290
1995	17,263,728	64.0	33,379
1996	19,806,691	72.3	35,617
1997	22,029,761	80.7	36,946
1998	24,555,201	89.6	37,928
1999	33,181,159	115.1	38,414
2000	30,925,434	101.1	39,892
2001	26,792,162	88.4	40,157
2002	22,802,792	72.7	38,894
2003	31,107,425	84.9	41,051
2004	36,540,980	89.2	38,724
2005	40,512,446	92.6	39,096
2006	50,074,966	106.1	43,104
2007	60,456,082	114.0	44,034
2008	32,418,516	56.2	43,949
2009	47,471,293	83.8	42,669
2010	54,259,518	87.3	43,427
2011	47,521,341	68.8	44,323
2012	54,503,237	78.4	43,772
2013	64,367,842	89.0	44,853
2014	67,177,254	90.3	45,743
2015	62,268,184	94.5	43,983
2016	65,117,714	97.1	43,806
2017	79,501,948	111.1	43,440
2018	68,893,044	91.9	43,554
2019	78,825,583	108.4	43,248
2020	93,686,226	134.7

Calculation

Market cap is given by the formula ${\textstyle {\text{MC}}=N\times P}$ , where MC is the market capitalization, N is the number of common shares outstanding, and P is the market price per common share.^[7]

For example, if a company has 4 million common shares outstanding and the closing price per share is $20, its market capitalization is then $80 million. If the closing price per share rises to $21, the market cap becomes $84 million. If it drops to $19 per share, the market cap falls to $76 million. This is in contrast to mercantile pricing where purchase price, average price and sale price may differ due to transaction costs.

Not all of the outstanding shares trade on the open market. The number of shares trading on the open market is called the float. It is equal to or less than N because N includes shares that are restricted from trading. The free-float market cap uses just the floating number of shares in the calculation, generally resulting in a smaller number.

Market cap terms

Traditionally, companies were divided into large-cap, mid-cap, and small-cap.^[8]^[4] The terms mega-cap and micro-cap have since come into common use,^[9]^[10] and nano-cap is sometimes heard. Different numbers are used by different indexes;^[11] there is no official definition of, or full consensus agreement about, the exact cutoff values. The cutoffs may be defined as percentiles rather than in nominal dollars. The definitions expressed in nominal dollars need to be adjusted over 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 market caps are likely to be different country to country.

References

^ "Market highlights for first half-year 2010" (PDF). World Federation of Exchanges. Archived from the original (PDF) on July 22, 2013. Retrieved May 29, 2013.
^ Graham, John R; Smart, Scott B.; and Megginson, William J. (2010). Corporate Finance (third ed.). Mason OH: South-Western Cengage Learning. p. 387. ISBN 9780324782967.{{cite book}}: CS1 maint: multiple names: authors list (link)
^ Graham, Smart and Megginson op cit p. 387.
^ ^a ^b "Market Capitalization Definition". Retrieved April 2, 2013.
^ "Financial Times Lexicon". Archived from the original on September 25, 2016. Retrieved February 19, 2013.
^ ^a ^b "Market capitalization of listed domestic companies (current US$) | Data". Data.WorldBank.org. Retrieved September 20, 2021.
^ Graham, Smart and Megginson op cit p. 387.
^ "Large Cap, Mid Cap, and Small Cap Stocks". Financial Edge. Retrieved September 15, 2022.
^ "Mega Cap Definition". Retrieved April 2, 2013.
^ "Micro Cap Definition". Retrieved April 2, 2013.
^ "Definition of Market Capitalization". Archived from the original on October 1, 2020. Retrieved August 3, 2008.