Market Cap: What You Need to Know

Zahir Shah |

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As discussed in different financial forums, market capitalization, or market cap, is among the most essential economic indicators that can help investors make wise choices. Market cap is instrumental in determining diversification of stocks, calculating risks, and identifying returns in a share.

For individual investors, the results of market capitalization can be used to purchase the shares of companies that are doing well, or sell the shares of companies that are nearing a financial crisis.

For company owners, especially owners of publicly traded companies, it is a useful indicator as well, since it can point out the number of stocks, as well as the current share price. Ultimately, it can be a way for a company owner to evaluate the health of their companies and to decide upon the best course of action going forward.

So What is Market Cap?

Market capitalization is the overall dollar value of shares upon their release in the market. Since it focuses on income, future cash flow, and outstanding stocks (or stocks that are processed in public markets), it could serve as a proxy for a company’s net worth. If such stocks are laid down, investors can see whether putting their money in purchasing a certain company’s share is worth it.

Market Cap Categories

Since different criticisms regarding the inaccurate way of measuring a company’s value through market capitalization have emerged, political economists have structured categories for the indicator. According to critics who have given light to the fact that not all companies come in the same sizes, presenting a general formula for calculating a company is unjust. As a solution, companies are now classified into three groups:

  1. Small Cap
  2. Mid Cap
  3. Large Cap

How to Calculate Market Cap

Calculating market capitalization is easy – no complex calculations are involved. With the necessary data, you simply have to highlight the number of a company’s outstanding shares, and the price for each share. By multiplying the two figures, you can get a desired result.

Therefore, the formula for calculating the economic indicator is as follows:

Market capitalization = number of outstanding shares X price per share

For Example:

Say a company intends to determine its worth via market capitalization. First, you gather necessary data and calculate the total amount based on the data. If its outstanding shares are 10 billion, and the price for each of its shares is $40, its market cap is, therefore, $400 billion.

Expert opinions shared by Johnson, an economist from Admiralmarkets.ae

DISCLOSURE: The views and opinions expressed in this article are those of the authors, and do not represent the views of equities.com. Readers should not consider statements made by the author as formal recommendations and should consult their financial advisor before making any investment decisions. To read our full disclosure, please go to: http://www.equities.com/disclaimer

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