What It Is:

Market capitalization refers to the value of a company's outstanding shares. The formula for market capitalization is:

Market Capitalization = Current Stock Price x Shares Outstanding

It is important to note that 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).

How It Works/Example:

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.

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.

Companies with less than $1 billion of market capitalization are generally regarded as small cap companies. Large cap companies usually have at least $8 billion of market cap.