Flibbertigibbet

Market Capitalization: What's That?

This is awful to admit, but I am less than three months away from graduating with a Masters in Business Administration and I found out just this morning what Market Capitalization is.

It's one of those concepts that has been thrown around in my classes since Day One, let there be light, but no one has really stopped to talk much about it.

Anyway, I have a midterm today in my Financial Analysis class and I though it important to learn what Market Cap is.

Behold the power of Wikipedia:

Market capitalization, often abbreviated to market cap or mkt. cap, 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. That is, 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.

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 greatly exceed the book value of the company itself due to stock market oddities. 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 had market caps of billions of dollars.

One reason for high market caps is that the price of a stock is determined by trade (supply and demand) on the market. However, the amount of shares outstanding (i.e. available to outsiders for trading) is less than the total number of shares, and many shares will be owned by large institutional investors who don't trade often. As a result, on any given trading day only a tiny percentage of shares is actually traded. If all available stock became available on the open market all at once, the price would plummet.

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.

And now we know.