Given a bit fancy name, market capitalization is a simple concept to understand for the stock market savvy people. Market capitalization is powerful tool to calculate and understand the company’s and stock market net worth . It is a numerical figure that is further interpreted by comparing the benchmark. The mathematical formula of market capitalization is as follows:
Market Capitalization = Share Price*Number of shares outstanding
Here, number of outstanding shares refers to the total number of shares that are issued and traded in the stock market. In the simplest means, it describes the total market value of the company’s traded shares. Size of firm is determined through the underlying measure. Greater figure of market capitalization is favorable for the company. According to the benchmarks, companies are categorized in several categories based upon the above mentioned measure i.e., large cap, medium cap and small. It further should be noticed that the company’s capital structure has a significant impact on the apparent figure of market capitalization. To compensate this dilemma, market caps are categorized by having a homogeneous group of companies at aside. Usually the market caps have the following benchmark values:
Large Cap: MC greater than 10 Billion
Medium Cap: MC between 2 Billion to 10 Billion
Small Cap: MC less than 2 Billion
Hence, the usage of the measure of market capitalization is so broad still it has to face the numerous criticisms. Contemporary Finance gurus have proposed many alternate measures proposing better and understandable output such as Enterprise or Embedded Value (EV) etc.