Market capitalisation, or market cap, is the market value of a company’s outstanding shares.
- Market capitalisation, or market cap, is the market value of a company’s outstanding shares.
- It’s calculated by multiplying the number of the company’s shares that are outstanding by the current price of one share.
- Outstanding shares are those company shares that are held by its shareholders.
- As the price of a company’s share rises, the value of its market cap rises as a consequence.
What is market cap?
The calculation of market capitalisation is simple and is based on the following formula:
Market capitalisation = Current share price x Outstanding shares
For example, if a chosen company is currently quoted on the market at $78 a share and the number of outstanding shares is equal to 10 million shares, then this company’s market capitalisation is equal to $780 million.
Market capitalisation is a great indicator of a company’s size, but should not be mistaken for what the company is actually worth. Some categories of market capitalisation include:
- Large cap: Companies with a market capitalisation of over $10 billion, such as Microsoft and General Electric.
- Mid cap: Companies with a market capitalisation between $2-10 billion, such as Tripadvisor and Western Union.
- Small cap: Companies with a market capitalisation between 300 million US Dollars and 2 billion US Dollars. Such companies include Tag Immobilien and Triumph Group.
Misunderstandings about the market cap
Although market cap is the market value of a company’s outstanding shares, it’s important to point out that it does not actually measure the equity value of a company. It simply reflects the total value of the shares of that company.
Shares are often over- or undervalued by the market, which means that the market price determines only how much the market is willing to pay for its shares. But this does not determine the amount the company would cost to acquire in a merger transaction, for example. A far better method of calculating the price of acquiring a business outright is the enterprise value.
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