|
Market capitalization, often abbreviated to market cap, mkt. cap or market value, is a business term that refers to the overall value of a company's stock. In essence, it is the price one must pay to buy an entire company. It is simply the product of the number of shares of the company and the current price of those shares. The term capitalization is sometimes used as a synonym of market cap; other times, it denotes market cap plus long term debt.
The total market capitalization of all the companies listed on the New York Stock Exchange is greater than the amount of money in the United States.
Valuation
Main article: business valuation
Market cap is the price of a company's stock, and may not reflect the "fundamental" situation of the company, because it's based on assumptions about the future. It is not uncommon for a company's market cap to many times larger than the company's "book value" (shareholders' equity) or earnings, if there's anticipation of earnings growth. For instance, in the late 1990s the shares of internet-related companies were highly valued by the market, and tiny companies with almost no sales, but high growth, had market caps of billions of dollars.
The first reason for a "high" market cap is the "fundamental" reason (see fundamental analysis), which is anticipation of future growth in cash flow from the operations that the company carry out to add value and earn money in the marketplace. The second reason is price increase from pure "speculation" of higher price, perhaps because of a large price increase in the past, or because of technical analysis. A third uncommon reason for price increase beyond anticipated returns is government "intervention," government buying shares.
Time horizon
The difference in time horizon for investments made on "fundamental" and "speculative" grounds is usually a longer horizon (more than a year) for fundamental reasons, while speculation are obviously in most cases made with a time horizon of less than a year. Selling a share short even has the word "short" in its name in reference to the time horizon of the investment.
"Float"
The amount of shares avaliable on the open market, the "float" (or "free float") is sometimes less than the total number of shares because a portion of the outstanding shares may be held by "insiders," and a portion of shares may be held by the company as treasury stock. And in addition to the float being perhaps much smaller than the total number of shares, a large portion of the float may be owned by large institutional investors who don't trade often. As a result, on any given trading day, generally only a small percentage of shares is traded, as in the example of Yahoo!, about 1.5% (20,025,727/1,180,000,000).
If all company stock became available on the open market all at once, as a result of both the insiders and the company selling all its shares, the price may plummet, if it's unexpected and hasn't already been priced in the stock price. Usually insiders don't hold more than a few to perhaps 10% of its own stock. And the treasury stock is almost always smaller than that.
Market Cap
- Small-cap: Everything up to a max. of $500 million (alternatively $200m/$300/$1b)
- Mid-cap: up to $1 billion ($5b/$10b)
- Large-cap: everything bigger than mid-cap
Less used are:
- Micro-cap: $50 million up to $300m (with small-cap 300m-$1b)
- Nano-cap: Under $50 million
and
- Mega-cap: Market cap of $200 billion and greater
Blue chip is used as a synonym for large-cap.
Examples
Yahoo! Inc. ([1] (http://finance.yahoo.com/q/ks?s=YHOO))
- Valuation measures
- Market Cap (intraday): 51.21B
- Enterprise Value (25-Dec-04)³: 49.04B
- Trailing P/E (ttm, intraday): 98.54
- Forward P/E (fye 31-Dec-05)¹: 74.50
- PEG Ratio (5 yr expected)¹: 3.66
- Price/Sales (ttm): 16.22
- Price/Book (mrq): 8.32
- Enterprise Value/Revenue (ttm)³: 15.51
- Enterprise Value/EBITDA (ttm)³: 71.99
Buyouts
In large corporate takeovers, the buying company usually either buys a controlling interest from institutional investors or venture capitalists at a discount (in cash), or, more commonly, pays for the shares of the second company in kind; i.e. in shares in itself. This allows the former owners (who now own stock in the controlling company) to sell off the shares bit-by-bit, so as to not ruin the price by dumping.
The opposite case, the book value of the company being more than the market cap, is typically more rare (selling shares is a method of raising money, after all). However, periodic dips in the market and other effects can result in such inversions of the market cap, making the company in question a target for the corporate raider.
Levels
Stock market capitalisation 2003 (compared with GDP converted to € through estimated purchasing power parity exchange rates)
- EU: €6.0 trillion (59% of PPP GDP)
- Japan: €2.4 trillion (75% of PPP GDP)
- United States: €10.7 trillion (108% of PPP GDP)
See also
Lists
External links
Data
| 
