Market capitalization

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Market capitalization (aka market cap, mkt cap or capitalized value) is a measurement of corporate or economic size equal to the share price times the number of shares outstanding of a public company. As owning stock represents owning the company, including all its assets, capitalization could represent the public opinion of a company's net worth and is a determining factor in stock valuation. Likewise, the capitalization of stock markets or economic regions may be compared to other economic indicators. The total market capitalization of all companies in the world was $51.225 trillion in March 2007 [1].

[edit] Valuation

Stock market capitalization in 2005

Market capitalization represents the public consensus on the value of a company's equity. A corporation, including all of its assets, may be freely bought and sold through purchases and sales of stock, which will determine the price of the company's shares. Its market capitalization is this share price multiplied by the number of shares in issue, providing a total value for the company's shares and thus for the company as a whole.

Many companies have a dominant shareholder, which may be a government entity, a family, or another corporation. Many stockmarket indices (S&P 500, Sensex, FTSE, DAX, Nikkei, MSCI) adjust for these by calculating on a "free float" basis, ie the market capitalization they use is the value of the publicly tradable part of the company.

Note that market capitalization is a market estimate of a company's value, based on perceived future prospects, economic and monetary conditions, and therefore largely independent of a company's history. Stock prices can also be moved by speculation about changes in expectations about profits or about mergers and acquisitions.

It is possible for stock markets to get caught up in an economic bubble, like the steep rise in valuation of technology stocks until the crash in the year 2000. Speculation can affect any asset class, such as gold or real estate. In such events, it is normal for companies to become valued on past momentum extrapolated into the future plus justified by a convincing story as well as success, until it goes wrong and the world mean-reverts, causing significant losses. Conversely, stock markets will usually be the primary transmission mechanism for most of the pleasant surprises that occur in the world's economy.

Categorization of companies by capitalization

The range of the capitalization serves as a handy way to classify companies in general:

• Micro-Cap: capitalization below $250 million.
• Small-Cap: capitalization between approximately $250 million and $2 billion
• Mid-Cap: capitalization between approximately $2 billion and $10 billion
• Large-Cap or blue chip: capitalization over approximately $10 billion