Market Capitalization

Market capitalization measures the size of a corporation or a company, equaling the price of shares times the number of outstanding shares in publicly traded companies. These shares are authorized, issued, and then bought by the investors. To own stock is to have an ownership of a company and its equity, whereby market capitalization represents the public opinion of the net worth of the same company. It is a major factor in stock valuation. In a similar way, capitalization of economic regions or stock markets can be compared with different economic indicators.

It should be noted that market capitalization represents an estimate of the value of a company. It is based on the monetary and economic conditions, as well as the company’s future prospects. Stock prices move due to speculation about expected profits or future mergers and acquisitions.

In 2007, a total of 434 gas and oil companies were listed on the Toronto Stock Exchange and TSX Venture Exchange, with market capitalization of close to $545 billion. With the merger of the London Stock Exchange and the Toronto Stock Exchange in 2011, the market capitalization of their combined equity stood at $5.9 trillion. Giants such as Air Canada, Bank of Nova Scotia, the Barrick Gold Corporation, and the Canadian National Railway Company are listed on TSX.

Cap stands for capitalization, helping to classify companies by size. When the market capitalization of companies is less than $10 million, they are referred as nano caps. These are small public companies compared to mid and large caps. Some of the exchanges and brokerages have differing definitions of a nano cap. Nano caps are used to describe the smallest market capitalization possible, with nano cap stocks considered quite risky. Micro caps are businesses with market capitalization in the range $10 and $100 million. Again, there is no precise definition of the term, which varies between different brokerage houses.

Small caps refer to stocks with comparatively small market capitalization, typically between $100 million and $1 billion. Small caps are relatively young or new companies with a potential of bigger capital appreciation but are riskier as well.

An obvious advantage to investing in small caps is the chance to get ahead of institutional investors. Mutual funds have restrictions that prevent them from purchasing large amounts of outstanding shares; so, they cannot give small-stocks a meaningful position at the fund. The fund has to file with SEC as to overcome the limitations, which inflates the former attractive price.

Mid caps refer to the common stock of companies with a mid-level market capitalization. It is usually between $1 and $10 billion, but no precise cutoff points can be defined on both ends. The term also relates to mutual funds that hold mainly mid-cap stocks. Large caps refer to businesses with a market capitalization of over $10 billion and up to $100 billion. The term large cap denotes large market capitalization. Large cap companies are big players such as General Electric, Microsoft, and Wal-Mart. Finally, mega cap companies have a market capitalization of over $100 billion.

In general, the market cap takes into account only the equity value of companies. Insurance firms use another measure called EV or embedded value. Enterprise value is another more comprehensive measure that includes debt at market value and other factors. The enterprise value is equal to the common equity, debt, minority interest, and preferred shares at market value, minus cash and cash-equivalents. Since a company’s debt has to be paid off by investors who are taking over, the enterprise value offers a more accurate valuation.