Market Capitalization: Meaning, Formula and Importance

market capitalization

Market Capitalization tells us how much the company is worth in terms of stock market. Market Capitalization can be simply calculated by multiplying current stock price of the company with the total number of shares of the company. It is an important metric for analyst to compare the companies within same industry. Companies with high Market Cap have long term presence, stable business model and revenue stream but can lack in rapid growth compared to start ups or companies with small Market Cap.

Let us understand Market Capitalization in detail.

What is Market Capitalization?

  • Market Capitalization provides us the information about how much a company is worth in terms of stock market
  • Based on the supply and demand of the stocks of the company, the Market Ca of the company can be calculated
  • Since Market Cap is the product of current stock price and the total number of shares of the company, when the demand is high, investors take the stock price high to increase the Market Cap of the company
  • When the growth prospects of the company looks low, the investors sell the shares to get stock prices down thus decreasing the Market Cap of the company
  • Market Capitalization alone should not be the only factor to analyze stocks and compare them with similar companies in same industry
  • Enterprise value which also considers the company’s total debt and cash equivalents is the better way to find company’s worth during acquisitions or mergers

ALSO READ: Top 6 Financial Ratios to Select Stocks

How Market Capitalization is Calculated

Market Capitalization can be easily calculated by multiplying the current stock price with total number of shares of the company.

Example

Let’s say if company A has 10,000 shares with price of Rs. 100 than the Market Cap of company A will be Rs. 10,00,000. It is simply multiplying both these numbers

Let’s say company B has 1000 shares with price of Rs. 10,000, than the Market Cap of company B will be Rs. 1,00,00,000.

So company B is having high Market Cap than company A, even though company A has more number of shares.

So the Market Cap of company depends on both these numbers and should not be used as a standalone metric to analyze stocks.

Market Capitalization Formula

As mentioned above below is the formula to calculate Market Capitalization of a company:

Market Capitalization = Current Stock price * Total number of shares

Why is Market Capitalization Important?

Below are some points to consider while analyzing stocks in terms of Market Capitalization:

  • It provides us the metric to sort the companies in descending order of how big the companies are when we are analyzing them
  • High Market Cap over a long period of time means the company has seen the ups and downs in the market and also it has established the business over time
  • The company might also have regular stream of revenue to be generated
  • Based on Market Cap, the companies are identified as large cap, mid cap and small cap companies

ALSO READ: Difference between Large Cap, Mid cap and Small cap companies

Examples of Companies with High Market Capitalization

Below are the examples of companies with high Market Capitalization in India, as of writing of this article:

  • Reliance Industries Ltd
  • Tata Consultancy Services Ltd
  • HDFC Bank Ltd
  • ICICI Bank Ltd
  • State Bank of India
  • Infosys Ltd
  • Bharti Airtel Ltd
  • Life Insurance Corporation Of India
  • Hindustan Unilever Ltd
  • Itc Ltd

Market Capitalization Categories

There are 3 categories of companies based on Market Capitalization:

  • Large Cap: These companies usually have the market cap of Rs. 20,000 crore or above. They are the top 100 companies in India based on Market Cap
  • Mid Cap: Usually they have the market cap between Rs. 5000 crore to Rs. 20,000 crore. They are ranked between 101 to 250 in terms of market cap
  • Small Cap: These companies usually have market cap of below Rs. 5000 crore. They are ranked 251 and above in terms of market cap

Market Capitalization Misconceptions

There are certain misconceptions about market cap:

  • A company might have double market cap but that does not mean it’s revenue or profits will also double every time when you compare other companies in same industry
  • Market cap does not measure the equity value of the company, a better metric would be enterprise value while calculating the actual worth of company
  • It is calculated based on current stock price of the company which can go up and down based on market sentiments, so it does not accurately reflect the business worth

Conclusion

So Market Capitalization is a good factor to consider while analyzing stocks of the companies, but should not be the only factor while selecting stocks. It is the product of current stock price and the total number of shares of the company.

Market cap can be further divided into large cap, mid cap and small cap companies and can be ranked as per the Market Cap.

Some more Reading

Frequently Asked Questions

What do you mean by market capitalization?

Market cap defines the company’s worth by multiplying the current stock price and the total number of shares of the company. It is one of the important factors while analyzing companies, and analysts use this metric to compare companies within same industry.

What is the formula for market cap?

Formula for market cap is very simple:

Market cap = Current stock price * total number of shares

What is India’s market cap?

Companies are categorized is India based on market cap as – large cap, mid cap and small cap companies. Large cap companies are more stable compared to mid cap and small cap categories due to their presence and stable business models to generate revenue. Mid cap and small cap companies have high growth potential but are risky in nature.

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