Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail
Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

Market Capitalization

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 Shares 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 10,000,000 shares outstanding and 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.

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