Market capitalization is the money for which you can sell the outstanding shares of your company on a particular market. The formula to calculate it is this: Market cap = price per share x number of shares due. For instance, if the price is $10 per share and total due shares are 400 million, then your market cap is $4 billion.
Categories of Market Capitalization
Broadly speaking, the stock exchange categorizes companies into the following on the basis of market cap.
Also known as big-caps, these are businesses that have a market capitalization in excess of $10 billion. Some of the largest companies in the world by market cap are Apple, Facebook, IBM and Microsoft.
The term ‘mid-caps’ is used to refer to companies that have a market capitalization ranging between $1 billion and $10 billion. Generally, mid-capitalization stocks are relatively more unstable than big-cap stocks, plus these comprise more growth-oriented ones.
These are companies having a market cap amid $250 million and $1 billion. Small-cap stocks are a high-risk investment that usually yields high return when companies are at the growth phase. Numerous companies fall under the category of small caps.
Micro capitalization stocks are rather young. The potential for both decline and growth of ‘mid-caps’ companies are alike. These stocks are not regarded as the safest option of investment in terms of risk-return trade-off. So, one should research a lot about these stocks before putting money into them.
You can use the classification and the actual market cap value of a company to make wise investment choices. Usually, big-cap businesses have more assets and capital than the small-cap ones, and therefore, they are regarded as lower-risk investment options than the latter. Furthermore, small caps often show much higher potential for growth than their bigger counterparts, and hence, they may give investors more chances of capital gains.
Market Capitalization versus Enterprise Value
It is important to note that the market cap of a company is just the overall value of their equity. The enterprise value of that company is their whole business’s value, including both debt and equity capital.
Let us take a look at the example of a house. If it has a mortgage of $700,000 and is worth $1100,000, then $400,000 is that house’s equity value. The same goes for a company. One with an equity value (market cap) of $8 billion, plus debt of $6 billion has $15 billion in enterprise value.