Market Capitalization

Market capitalization (also market cap) is the current market value of all the outstanding shares of a company listed on a stock exchange. It is calculated as the product of current market price of the company’s common share and the number of its outstanding common shares.

Market capitalization is the measure of the size of the company. It is the value which investors assign to the equity i.e. the net assets of the company.

Companies are often classified by their market capitalization into large-cap, mid-cap and small-cap. Studies are conducted to determine the distinguishing characteristics of the different classes. For example small-cap companies are considered to be more risky and hence high return is expected on their equity.

Formula

Market Capitalization = Current Market Price × Number of Outstanding Common Shares

Number of outstanding common shares equal the number of shares issued minus shares held by the company. It means that only the shares floating in the market are relevant for calculation of market capitalization.

Example

Current market price of ConocoPhilps (NYSE: COP) is $70.44. Its authorised capital is 2,500 million. 1,767 million shares are issued, out of which 542 million shares are held as treasury stock.

Total number of outstanding shares = 1,767 million − 542 million = 1,225 million

Market capitalization = $70.44 × 1,225 million = $86,289 million

Written by Obaidullah Jan