MARKET CAPITALISATION

Market capitalization, often abbreviated to market cap, is a measurement of corporate size that refers to the current stock price times the number of outstanding shares. This measure differs from equity value to the extent that a firm has outstanding stock options or other securities convertible to common shares. The size and growth of a firm's market capitalization is often one of the critical measurements of a public company's success or failure. However, market capitalization may increase or decrease for reasons unrelated to performance such as acquisitions, divestitures and stock repurchases.

Market capitalization is the number of common shares multiplied by the current price of those shares. The term capitalization is sometimes used as a synonym of market capitalization; more often, it denotes the total amount of funds used to finance a firm's balance sheet and is calculated as market capitalization plus debt (book or market value) plus preferred stock.

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 [1]. The global market capitalization for all stock markets was $43.6 trillion in March 2006 [2].

Valuation

Market capitalization is a function of the price of a firm's stock and may not accurately reflect intrinsic value because of varying future expectations held by investors. It is common for a firm's market capitalization to exceed "book value" (shareholders' equity) because market prices tend to increase at a quicker pace than earnings accumulate due to value placed on expected future 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) generated market capitalizations in the billions of dollars.

"Float"

The amount of shares available on the open market, the "free float", is sometimes less than the total number of shares because a portion of the outstanding shares may be held by "insiders," and/or by the company as treasury stock. In addition to the float being perhaps much smaller than the total number of shares, a significant portion of the float may be owned by large institutional investors who rarely trade. As a result, on any given trading day, generally only a small percentage of shares are traded, as in the example of Yahoo!, about 1.5% (20,025,727/1,180,000,000).

The sudden availability on the open market of all of a company's stock, as a result of both the insiders and the company selling all shares held, could cause a plummet in the stock price (if unexpected and not already priced in by the market).

Categorization of companies by market cap

While there are no strong definitions for market cap categorizations, a few terms are frequently used to group companies by capitalization.

In the U.S., companies and stocks are often categorized by the following approximate market capitalization values:

Small-cap: market cap below US$1 billion
Mid-cap: market cap between US$1 billion and US$5 billion
Large-cap: market cap exceeds US$5 billion

The small-cap definition is far more controversial than those for the mid-cap and large-cap classes. Typical values for the ranges are enumerated here:

Micro-cap: market cap under US$100 million

Nano-cap: market cap under US$50 million

Blue chip is sometimes used as a synonym for a large-cap, while some investors consider any micro-cap or nano-cap issue to be a penny stock, regardless of share price.

Examples

Examples of share valuation compared to market cap (price), and share ownership, from Yahoo! Inc. ([3], [4])

Valuation measures

Market Cap (intraday): 51.21B
Enterprise Value (25-Dec-04): 49.04B
Trailing P/E (ttm, intraday): 98.54
Forward P/E (fye 31-Dec-05): 74.50
PEG Ratio (5 yr expected): 3.66
Price/Sales (ttm): 16.22
Enterprise Value/Revenue (ttm): 15.51
Enterprise Value/EBITDA (ttm): 71.99

Share statistics

Average Volume (3 month): 20,025,727
Shares outstanding: 1.37B
% of shares held by Insiders: 14%
% of shares held by Institutions: 74%
Float: 1.18B
% of float held by Institutions: 86%
Treasury stock: $160M

ttm = Trailing twelve months (or last twelve months)

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)

One way to measure the "madness" is to measure the value of the stock market's overall capitalization to the size of the national Gross Domestic Product. Historically the stock market value has been about 58% of GDP. Lows were in the range of 37% in the early 1950s, and 25% at the bottom of the Great Depression. Highs in this measurement were around 75% and occurred at all the important market turning points in the last 80 years including 1929 and 1966. As recently as 1991, the market was at the historic 58% level of GDP.

Since 1991, all semblance to reality began to be lost in this particular measurement. By the 4th quarter of 1999 stock market capitalization had increased to an atmospheric and unprecedented 185% of total GDP. Even today the rate is still 104%.

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