What is market capitalization and how to calculate it

It allows you to approximately find out how much this company costs in the stock market. Traditionally, market capitalization is also called the cost of capital in the stock market, and this is an elementary mathematical calculation. However, it is only one of the guidelines in assessing the value of the enterprise. Let’s look at what components this characteristic is made up of, how it is calculated and what are the differences from other valuation methods that can be used when selecting specific stocks for investment.

Calculation of market capitalization

To calculate capitalization, you need to know the exact number of shares issued by it for the entire time, from the time it enters the stock market to the current moment. Now such information is quickly found in specialized publications such as Reuters, as well as in the financial statements, which are published directly by the company itself. This figure is multiplied by the price at which one share is sold..

Suppose you want to calculate how much the stock market is valuing at Apple. As of March 23, 2018, the company issued 5,074,010,000 shares at a price of $ 168.39 each. Multiply the numbers and see – Apple’s market capitalization is $ 854,412,543,900.

How capitalization is used in investments?

Market capitalization is a convenient tool for investors, allowing you to understand the scale of the organization. Companies whose capitalization exceeds $ 10 billion are typically dominant industry players with consistent earnings. They strongly contrast with small companies, which the stock market estimates ranging from $ 300 million to $ 2 billion, as well as aggressive young startups, investments in which offer a wider range in the risk-reward ratio. Medium risk stocks are offered by firms located between these categories..

Market capitalization compared to other benchmarks for valuation

Capitalization is a floating short-term figure that shows only how the market evaluates the company at the current time. When calculating it, the internal financial indicators of a particular enterprise are not taken into account. Some investors consider the corporate value of the company to be true value. It includes characteristics such as debt, cash, and assets that affect the price that could be stated when selling the company to another owner.

Another way of assessing the value of an enterprise is book value. This is the amount that shareholders can expect in the event of a full sale of the company and repayment of all debts (deducting debt from all assets of the company). Carrying value is usually lower than market value, since the latter is, in fact, a forecast of value for the future, which takes into account the future flow of profit.

How can one artificially regulate a company’s market valuation?

Market capitalization rises and falls based on factors that, in reality, may have nothing to do with the internal processes of the company. Such as supply or demand. For example, if investors invest in index mutual funds, these funds require the purchase of shares in the corresponding index. This leads to an increase in stock prices. Otherwise, general panic in the stock market may lead to lower prices for the company’s shares, although the intrinsic value of a “cheaper” company shows a different dynamics..

Similar articles

• What are dividends, how to receive and calculate them

  This is part of the company’s profit, which is distributed among all shareholders. If you own shares in the company, then you receive the right to dividends. But…

• In which shares to invest for a novice investor in 2018

  The growth trend of the stock market has been going on for the eighth year in a row, which poses a difficult challenge for a beginner in choosing the right assets. After all, among…

• Securities

  Security paper? this is a document of a standard form, which gives a citizen certain rights to dispose and use specific types…