What It Is:
Market capitalization refers to the value of a company's outstanding shares.
How It Works/Example:
The formula for market capitalization is:
Market Capitalization = Current Stock Price x Outstanding
It is important to note that market capitalization (sometimes called "market cap") is not the same as equity value, nor is it equal to a company's debt plus its shareholders' equity (although that is sometimes referred to as simply the company's capitalization).
Let's assume Company XYZ has 10,000,000and the current share price is $9. Based on this information and the formula above, we can calculate that Company XYZ's market capitalization is 10,000,000 x $9 = $90 million.
Why It Matters:
Market capitalization reflects the theoretical cost of buying all of a company's shares, but usually is not what the company could be purchased for in a normal merger transaction. To estimate what it would cost for an investor to buy a company outright, the enterprise value calculation is more appropriate.
Thus market capitalization is a better measure of size than worth. That is, market capitalization is not the same as market value, which can generally only be assigned when the company is actually sold.