Why Is Market Cap Important?

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Market capitalization (or market cap for short) is a measure of the total value of a company that is listed on the stock market. The market cap of a publicly-listed company is the sum of the dollar value of all of that company's outstanding shares.

Calculating Market Cap

  • Consider this example: In late 2009, the hamburger chain McDonald's had about 1.08 billion shares outstanding, and the shares were trading for about $62 a share. The market cap of McDonald's is calculated by multiplying the total number of shares (1.08 billion) with the price of each share ($62), which yields a market cap of about $67 billion.

Market Cap and Stock Indices

  • Market cap is a measure of a company's importance. Companies with higher market caps are given more weight in the major stock indices.

Mergers and Acquisitions

  • Market cap is also important in merger and acquisition activities because it sets a company's "market price." Anyone wishing to buy a company will usually have to pay its owners at least the value of the company's market cap.

Fun Fact

  • Investors classify companies according to their market caps, with the most common three classifications being large-cap, mid-cap, and small-cap.

Warning

  • While market cap is a measure of a company's total worth, it is not a measure of a company's future performance. So a large-cap company is not necessarily a "better" investment than a small-cap company and vice versa.

References

  • Photo Credit Image by Flickr.com, courtesy of Perpetual Tourist
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