What Is the Meaning of Market Capitalization?
Market capitalization is a measure of the value of companies and stock markets. Investors use market capitalization, or just market cap, to divide companies into different investment categories. Comparing market cap at different time periods will show the growth in the value of a market or corporation.
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Definition
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The market capitalization of a publicly traded company is the current stock price times the number of shares outstanding. This is the value the stock market places for the entire company. It can also be described as the amount of money it would take to buy the entire company at the current stock price. The market capitalization of a stock market or stock index is the sum of the market caps of the individual stocks in the market or index.
Function
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A company's stock market price is available on financial websites such as Yahoo! Finance, Google Finance and MarketWatch. The shares outstanding can be found in the most recent quarterly earnings report. If a company has a stock price of $20 and 100 million shares outstanding, the market cap of the company is $2 billion. Financial websites such as Yahoo! Finance and Google Finance will show a company's current market cap on the stock price page.
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Significance
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Investors and money managers use the market capitalization of companies to divide them into different categories. According to Investopedia, large cap companies have market capitalization of greater than $10 billion, mid-cap companies are between $2 billion and $10 billion, and small cap companies are those with capitalization of less than $2 billion. Standard and Poor's has stock market indexes for the different company values. The S&P 500 is the 500 largest U.S. companies with caps greater than $3.5 billion. The S&P MidCap 400 has companies with caps from $850 million to $3.8 billion. The S&P 600 SmallCap index features companies from $250 million up to $1.2 billion. The cutoff line between categories is somewhat flexible.
Effects
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There's a tremendous spread in the value between the large cap and small cap companies. Using the S&P indexes and numbers, the 500 largest companies in the S&P 500 are about 75 percent of the total U.S. stock market value; the 600 companies in the SmallCap index compose only 3 percent of the U.S. market. The larger companies, with more than $100 billion of market capitalization, have a much greater effect on the direction of the overall market. There are about 50 companies worldwide with $100 billion-plus market caps, and half of those are U.S. companies. These companies move the stock markets.
Identification
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As of May 2010, the five largest companies in the world by market capitalization were Exxon Mobil, Microsoft, Industrial and Commercial Bank of China, Apple and PetroChina. Other companies near the top of the list are General Electric, Walmart, Proctor & Gamble and Bank of America. Exxon Mobil has a market capitalization of $318 billion; Bank of America, the smallest company listed here, is worth $180 billion. Compare these values to a company like Radio Shack, which is in the S&P 500 and has a market cap of $2.5 billion.
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