Market Capitalization: What It Is, Formula for Calculating It
Market capitalization is the aggregate dollar-value of all outstanding shares of a company’s stock. Although micro-cap stocks are considered to be volatile of the 5 categories, investors often allocate a percentage of their portfolio to micro-cap stocks because of their potential upside. Investing in large-cap stocks is often considered less risky compared to mid or small-cap stocks. Conversely, others might be attracted to small-cap or mid-cap stocks, seeking higher growth potential.
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In conclusion, the market cap we are left with for each company is $4bn again, confirming that our prior calculations were correct. In the next part of our tutorial, we’ll calculate the enterprise value starting from the market cap or equity value. Under the treasury stock method (TSM), the common share count factors in the exercise of potentially dilutive securities, resulting in a higher number of total common shares. In effect, the formula isolates the value of the company belonging solely to common equity shareholders, which should exclude debt lenders, as well as preferred equity holders. The Market Cap—or “Market Capitalization”—is the total value of a company’s equity from the perspective of its common shareholders. Our writing and editorial staff are a team of experts holding advanced financial designations and have written for most major financial media publications.
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In the case of funds, the terms represent the types of stocks in which the fund primarily invests. Market cap can be a valuable tool for investors watching stocks and evaluating potential investments. Market capitalization is a quick and easy method for estimating a company’s value by extrapolating what the market thinks it is worth for publicly traded companies. In trade with confidence on the world’s leading social trading platform an acquisition, the market cap helps determine whether a takeover candidate represents a good value to the acquirer.
- For example, the social media company Reddit (RDDT) is a mid-cap company, with a market cap of $9.84 billion as of the market close on June 18, 2024.
- Companies are categorized according to this metric as a big cap, mid-cap, or small cap, which is an easy way of identifying their relative overall size.
- Because of their growth orientation, they may be riskier since they spend their revenues on growth and expansion.
- Shares are often over- or undervalued by the market, meaning the market price determines only how much the market is willing to pay for its shares.
- Such companies are viewed as safer bets by investors, especially during volatile market conditions, as they believe these firms have the resources and resilience to weather economic downturns.
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One example is JetBlue Airways (JBLU), which had a market cap of $1.93 billion as the market close on June 18, 2024, putting it on the high end of small-cap stocks. Track records of such companies aren’t as long as those of the mid-to-mega-caps, but they also present the possibility of greater capital appreciation. Since the market price of shares of a publicly listed company keeps changing with each passing second, the market cap also fluctuates accordingly. It’s important to know that a company’s market capitalization is the total value of its equity only.
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The risk here is the highest among these three groups, but they might give investors the highest return on investment. Market capitalization is an inadequate way to value a company because its market price does not necessarily reflect its worth. When a stock share is sold, a buyer and seller exchange money for share ownership. This means that stocks with larger cryptocurrency trading market capitalizations make up comparatively more of the index. Some of the companies may or may not be industry leaders, but they may be on their way to becoming one. For example, the social media company Reddit (RDDT) is a mid-cap company, with a market cap of $9.84 billion as of the market close on June 18, 2024.
Using market capitalization also lets investors diversify their assets by including large-cap, mid-cap, and small-cap companies in their portfolios. Therefore, any significant change in a stock price results in an equal percentage change in the company’s market cap. A $0.10 drop in a stock price results in a $100,000 loss on paper for a shareholder with one million shares. With billions of dollars worth of valuation, a large-cap company may have more room to invest a few hundred millions in a new stream of business and may not take a big hit if the venture fails. However, a mid-cap or micro-cap company making a similar value investment may be susceptible to big blows if their venture fails as they don’t have that bigger cushion to absorb the failure. If the venture succeeds for large-cap companies, it may appear small in their profit numbers.
At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. To do that, you can use our amazing discounted cash flow calculator that can indicate whether the stock is overpriced or not. While the upward potential of such companies is high if they succeed, the downside potential is equally worse if they completely fail. Investments in such companies may not be for the faint-hearted and require more due diligence.
Importance of Market Capitalization
However, Alphabet’s market cap is currently around 2.23 trillion, per data platform Arcana. The higher the value of market capitalization, the “bigger” companies are perceived. For instance, technology companies often have higher market caps compared to firms in traditional sectors like manufacturing. Companies in certain sectors might naturally have higher market capitalizations than those in other industries, even if they generate similar revenues or profits.