Market capitalization or market cap is the aggregate valuation of a company based on its current share price and the total number of outstanding shares (also referred to as issued shares, common stock authorized by the company, issued, purchased and held by investors).
Market capitalization formula: market capitalization = closing price per share x number of outstanding shares
Example: If a company has 5 million shares outstanding and the closing price per share is $20, the company’s market capitalization is $100,000,000. If the price per share drops to $19, the company’s market cap falls to $95,000,000.
Market capitalization helps investors measure a company’s value and performance and determine the returns and the risk in a company’s shares.
Typically, companies are classified as large-cap (market cap of $10 billion or more), mid-cap (market cap between $2 billion and $10 billion), small-cap (market cap between $300 million to $2 billion), and micro-cap (market cap between $50 million and $300 million). Nano-cap has also come into use, in reference to companies with a market cap lower than $50 million.
Market cap disambiguation
Market cap is not necessarily what a company is really worth. The market cap formula doesn’t include cash or debt, and almost every company on the stock market has either cash, debt or both. Thus, market cap is not a thorough estimate of a company’s value, but rather a better measure of size than worth. Enterprise value (market cap – cash + debt) is a better estimate of what a company is actually worth.
Cryptocurrency market cap
In the cryptocurrency sector, market cap is used to determine the relative size of a digital currency or of all the digital currencies combined. The cryptocurrency market cap is calculated by multiplying the price by the circulating supply.
Cryptocurrency market cap formula: market cap = cryptocurrency price X cryptocurrency circulating supply
The cryptocurrency market cap metric is also a better measure of size than worth. For instance, bitcoin’s market cap was estimated at over $163 billion, on November 27. If someone was to buy the entire circulating supply of bitcoin on November 27, they would cost $163 billion. However, the circulating supply of bitcoin could be in fact worth more or less than their current market cap figure.
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