What is Market Capitalization (Market Cap)?
Market capitalization, commonly referred to as market cap, is a measure of the total value of a company's outstanding shares of stock. It is calculated by multiplying the company's current stock price by the number of its outstanding shares. Market cap is used as a tool to determine the size of a company and its relative value compared to other companies in the same industry or market.
For example, if a company has 1 million outstanding shares of stock and its stock price is $50 per share, its market cap would be $50 million. If the stock price increases to $100 per share, the market cap would increase to $100 million.
Market cap is used as a way to categorize companies by size. Companies with a market cap of less than $300 million are often referred to as small-cap companies, while companies with a market cap of $2 billion or more are referred to as large-cap companies. Companies with market caps between $300 million and $2 billion are referred to as mid-cap companies.
Investors use market cap as a way to determine the relative value of a company, and it can be used to help identify investment opportunities. For example, if a company has a low market cap but strong financials, it may be seen as an attractive investment opportunity.
It's important to note that market cap is not a perfect measure of a company's value, as it only takes into account the current stock price and the number of outstanding shares, and does not consider factors such as earnings, revenue, or future growth potential.
Simplified Example
Market capitalization is like the price of a big toy set. Imagine you have a big toy set with many pieces, and you want to know how much it's worth. To find out, you would count all the pieces and multiply that number by the price of each piece. That's the market capitalization of the toy set. In the same way, the market capitalization of a company is found by counting all the shares of the company's stock and multiplying that number by the price of each share. This gives you an idea of how much the company is worth or the total value of all the company's stock. Just like with the toy set, the higher the number, the more valuable the company is considered to be.
History of the Term Market Capitalization
The term "market capitalization" (market cap) emerged in the early 20th century, primarily used in the context of evaluating the size and value of publicly traded companies. It gained wider recognition in the 1950s and 1960s as financial markets became more sophisticated and investors sought standardized metrics to compare companies across industries.
Examples
Apple Inc.: As of 2021, Apple Inc. had a market capitalization of around $2.3 trillion, making it one of the largest companies in the world in terms of market capitalization.
Amazon.com, Inc.: Amazon.com, Inc. had a market capitalization of around $1.6 trillion as of 2021, making it one of the largest e-commerce companies in the world.
Microsoft Corporation: Microsoft Corporation had a market capitalization of around $2.0 trillion as of 2021, making it one of the largest technology companies in the world. The company is known for its Windows operating system and Office software suite, among other products and services
Related terms
Capital: Financial capital is a way to describe the money and other resources that people and businesses use to make things happen.
Liquid Market: The meaning of liquid market, sometimes called the perfect market, refers to an idealized economic concept wherein all participants in a given industry have equal access to information and pricing.