Market capitalization, often abbreviated to market cap, mkt. cap or market value, or referred to as just capitalization, 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. If one multiplies the number of shares of the company by the current price of those shares, the result is the market cap.
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.
Analysis
Market cap is an important measure of the performance of a company's stock, as opposed to the company itself. It is not uncommon for a company's market cap to many times above the comapny's "book value" or earnings, if there's anticipation of earnings growth. For instance, in the late 1990s the shares of internet-related companies was highly valued by the market, and tiny companies with almost no sales, but high growth, had market caps of billions of dollars.
The only reason for a "high" market cap is anticipation of future growth in cash flow from operations.
The amount of shares outstanding (i.e. available to outsiders for trading), the "float", is sometimes less than the total number of shares. A large number of the floar 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. If all available stock became available on the open market all at once, ie as a result of the company selling its share on the open market, the price may plummet, if it unexpected and hasn't already been priced in the stock price. Usually public companies don't hold more than a few to perhaps 10% of its own stock.
Examples
Yahoo! Inc. ([1])
- 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
- Share Statistics
- Average Volume (3 month): 20,025,727
- Shares Outstanding: 1.37B
- Float: 1.18B
- % Held by Insiders: 13.81%
- % Held by Institutions: 75.04%
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
- 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)