What Does
Market Capitalization Mean?
Market capitalization refers to when the total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures.
The term frequently referred to as market cap or MCap.
Divestopedia Explains Market Capitalization
Market capitalization refers to the value of a company’s outstanding shares representing the aggregate value of a company or stock. As outstanding stock is bought and sold in public markets, capitalization could be used as a proxy for the public opinion of a company’s net worth and is a determining factor in some forms of stock valuation.
In order to understand the term MCap, let’s assume the Company ABC Corp. 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 ABC Corp.’s market capitalization is 10,000,000 x $9 = $90 million.
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). 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 and advisable. Thus, in the context of M&A, market capitalization is a better measure of size than worth.