What is market capitalization

November 15, 2009

Big caps. Mid-caps. Small caps. Market capitalization. You've heard these terms tossed about by the media and at cocktail parties.

As an investor, here is what you need to know about them:

First market cap refers to the value or capitalization the market puts on a company. It's nothing more than another way of saying what the market value of a company's outstanding shares is worth at any given time. It is calculated by multiplying the price of the stock by the number of stocks issued.

Second, if you want to calculate a company's market capitalization, take the number of outstanding shares and multiply it by the stock's price. A company's outstanding shares (also known as issued shares) are the number of shares held by the general public as well as by the officers of the corporation.

For example if the stock of company XYZ is selling for 25 US dollars (USD) and there are 1,000,000 stock shares issued by XYZ, then the market cap for XYZ is 25,000,000 USD. Since the stock price typically varies from day to day, the market cap for a particular company also varies from day to day.

Third, there are no exact definitions for what constitutes big-cap, mid-cap, and small-cap stocks. The definitions change over time and vary from one brokerage house to another. Nonetheless, there is a rough-and-ready consensus as to how to differentiate them:

1. Large Caps: A large cap is generally regarded as having a market capitalization of more than $10 billion dollars.

2. Mid-Caps: A mid-cap stock has a capitalization that is less than that of a large cap but greater than that of a small cap.

3. Small Caps: A small cap is typically defined as a company capitalized with less than $2 billion but more than $250 million. Companies with capitalizations under $250 million are called micro caps.

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