Market Capitalization

Market Capitalization definition

Market capitalization is the value of the total outstanding shares of a company. It is computed by multiplying the total number of shares issued by the company with the price of a stock.

Market capitalization is used to categorize the stocks of companies to help investors pick them according to their risk profile.

There are large-cap, mid-cap, and small-cap companies.

Some investors, however, prefer to refer to a free-float market cap than just market cap.

Market Capitalization formula

Market capitalization is calculated by multiplying total outstanding shares of the company with the current market price (LTP) of the company’s share

market capitalization formula
Source: Wallstreet Mojo, Tavaga Research

Market Capitalization example

Reliance Industries has 6,503.13 million shares outstanding and today’s (30-09-2020) closing price is Rs 2,233.8 (on NSE). Therefore, Market capitalization = 6,503.13 million shares * Rs. 2233.8 = Rs. 14,526,367 million

What is the market capitalization, and why is it important?

Market capitalization also referred to as a market cap, is the total value of the company’s outstanding shares. The investor uses a market cap to determine company size and value. Market capitalization is determined by multiplying the market price of share with the number of outstanding shares. From this value, investors analyze the company’s worth in an open market. According to demand and supply, stock prices are determined by investors i.e., the public; therefore, the market cap is the public’s perceived value of the particular company.

For example, if ABC company has 10 million outstanding shares with a market value of RS.150 each, then the market cap of ABC company would be RS.150 Crore. Investors use this number to figure out the market size of the company.

Types of Market Cap

Companies are grouped together by market capsize. There are three types of market cap, large-cap, mid-cap, and small-cap. Size comparison.

Large-Cap: large-cap companies are classified as companies with market capitalization more than Rs.10,000 crore. Large-cap companies are major well-established companies with stable business models in the industry. The investor who does not want to take any risk invests in large-cap company’s shares. Large-cap stocks are considered safe investments. Investing in large-cap stock, the investor gets moderate yet safe returns.

Mid-Cap: mid-cap companies are the companies with a market capitalization between Rs.2,000 crore to Rs.10,000 crore. Mid-cap companies are usually in the developing phase, which also shows the potential to grow to a large-cap. The investment risk in mid-cap companies is higher than the large-cap.

Small-Cap: small-cap companies are the companies, which have market capitalization lower than Rs.2,000 crore. Small caps include young companies that serve new emerging markets that inherit higher risk because these companies have limited resources and are more vulnerable to intense competition and uncertainty of the market.

What is the current total market capitalization of India?

India’s total market capitalization was back at $2 trillion (as of 14th August 2020) after dropping in March as the markets plunged due to the pandemic caused by Covid-19.

India first crossed the market capitalization of $2 trillion in May 2017.

Are market value and market capitalization the same?

As the words suggest market capitalization and market value are clearly two different concepts.

Market value is determined with the help of various multiples such as P/E (Price to Earnings), P/S (Price to Sales), the future value of dividends, free cash flows, etc.

Market Capitalization on the other hand is simply determined by multiplying outstanding shares * current market price of share

Which factors affect the market capitalization of a company?

The following factors affect the market capitalization of a company:

  1. Demand and Supply of a particular stock
  2. Performance of competitors
  3. Economic environment and other factors such as macroeconomics, and geopolitics
  4. Company-specific news
  5. Company’s fundamental parameters

How to increase market capitalization

There are two through which companies can increase their market capitalization.

  1. If the market value of the stock increases, then market capitalization also increases; this is because the market cap is nothing but the value of the total outstanding shares of a company.
  2. Companies can increase the market cap by introducing new shares. For example, if a company increases its shares from 10 million to 20 million, with a market value of RS.150 each, then the market cap of the company would be Rs.300 crore.

Interesting or fun facts about market cap

  1. BSE is the oldest and largest stock exchange market in Asia, which was established in 1875. NYSE is the largest stock exchange by volume in the world.
  1. The world’s costliest stock is of Berkshire Hathaway.