Market Capitalization
In the news, we often hear that the value of company A has increased, and the value of company B has fallen, or that one billionaire has replaced another on the Forbes list. These two types of reports, however, are based on different measures.
Reports about a billionaire’s wealth, on the other hand, are based on net worth — a broader measure that accounts for all of a person’s assets (including private businesses, real estate, and other holdings) minus their debts, not just the value of their publicly traded holdings. For a company, the number of financial instruments issued for exchange/market circulation is calculated to determine this value.
Market Capitalization is applicable both to the value of a specific asset, such as a joint-stock company, where the exchange value of the company will be determined as the value of one share of the company at a given time at auction multiplied by the number of shares issued by the company.
This example can be translated into a simple formula:
The same formula is sometimes loosely applied to other assets, such as bonds or oil, to describe the total value of the amount in circulation. Strictly speaking, however, this is not Market Capitalization in the traditional sense, since that term specifically refers to publicly traded companies (and, by extension, cryptocurrencies) rather than commodities or debt instruments.
If a company issues several types of shares, such as ordinary and preferred, its Market Capitalization will be determined by the amount of these assets calculated using the formula specified above.
Also, the size of market capitalization can be calculated for entire economic sectors or even the entire global stock market.
There is a conditional division of companies by size of Market Capitalization:
- Large Cap — valuation exceeds $10B.
- Mid Cap — valuation is between $2B and $10B.
- Small Cap — valuation is between $300M and $2B.
- Micro Cap — valuation is under $300M.
Private investors use the size of Market Capitalization to analyze the importance of a company, its share in the total capitalization of companies in this financial sector, and how it stacks up against individual competitors.