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The Definitive Guide to Understanding Market Cap

Market capitalization (or Market Cap) is the value of a particular company that is traded on the stock market. It can be defined as the total market value of all outstanding shares of a specific company. A market cap is a critical tool for investors and financial advisors as it provides them with significant insight regarding a company’s performance on the stock market. Companies are then further categorized according to their market cap. For instance, companies that have a market cap between $300 million to $2 billion come under the small cap category. Companies that have a market cap between $2 billion to $10 billion are categorized under the mid-cap category. Any company with a market capitalization of $10 billion or more is a large cap. There is also another category that is considered being comprised of micro-cap companies. These companies usually have total stocks ranging between $50 million to $300 million.

What is the Market Cap?

In simple words, the market capitalization allows investors to determine how much of a company is worth or available on the stock market. As mentioned before, the market cap is very useful to investors while making future speculations and decisions. The category in which a company is placed states a lot about the level of risk involved in the investment. For example, small cap companies are considered to be young companies. Similarly, the level of volatility and liquidity vary for each individual category. Under this, large cap and mid cap companies are considered to be safe and stable investments but are more costly compared to other classes. However, it is essential to understand that not all companies are valued correctly on the stock market. Thus, we can say that there are some misconceptions about the market cap.

The prices of shares are determined by common economic factors such as supply and demand. Therefore, any change in the supply and demand can alter the overall valuation of the company on the stock market. This also implies that stocks may become overvalued or undervalued because of fluctuations in supply and demand. Hence, the market cap is not an accurate representation of a company’s equity value instead;, it is a constructed price dependent on several economic factors. The market cap is not a value that determines the price of the company with an acquisition or merger.

Market Cap Formula

The market cap formula is relatively simple and straightforward. It does not require any complicated equations to be solved. Instead, to find out the market cap of a particular company, all that is needed is the number of shares issued and the price of the share. For example, suppose a company has given 1000 shares in the market, and the price of an individual share is $50. Using these two figures, we can easily calculate the market cap of this company by multiplying the total number of outstanding shares by the share price.

→Market Cap = Total outstanding shares * Share price.

→ 1000 * 50 = $50,000.

Market Cap Vs. Revenue

The market cap and revenue of a company are two entirely different things and carry different meanings. We have already developed an understanding of what the market cap of a company is. Therefore, we will first discuss what revenue is before the comparison. The revenue of a company can be defined as the total amount of money raised by sales. The market cap of a company is merely the value of stocks issued on the stock market that can be publically traded. There is quite some difference between how the two financial indicators are calculated. Revenue is calculated by multiplying the total quantity of a product or service sold by a company by its price. For example, if a company sells 1000 products, and each product is worth $10, the revenue can be calculated by multiplying 1000 by 10. Through this, the revenue of the company would be $10,000, which is a value that is entirely different from its market cap.

Market Cap Vs. Enterprise Value

The market cap and enterprise are two measures that give the market value of a company; however, their calculation is different. Both steps are useful to investors and financial advisors for making comparisons. The fundamental difference between the market cap and enterprise value is that the latter takes the debt of a company into account. Thus we can state that the enterprise can identify the weaknesses in the measure of a market cap. The market cap does not take the internal situation of a company into account while determining its market value. The enterprise value provides investors a more reliable and transparent figure to base their financial decisions on.

→Enterprise value = market cap + preferred stock + outstanding debt + minority investment–cash and cash equivalents.

It is evident that the enterprise value is a much more sophisticated measure of a company’s market value as compared to the market cap. Therefore, the enterprise value can be regarded as a better financial indicator.

How to find historical market cap data

There are two ways to find historical market cap data for specific companies. First, the calculation can be performed manually for companies that openly upload their annual financial data in the form of reports. The total number of shares is listed, and there are several sources on the internet that give a listing of the share price. Some companies are generous enough to include the market cap for a specific year in their financial reports beforehand. Apart from this, there are many online sources that offer market cap figures for companies that are listed on public exchange markets.

Editorial Staff
Editorial Staff

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