What is Market Capitalization?

Market Capitalization is a common term when it comes to the stock market. If you are a beginner in the equity market, it is crucial to understand this term. “Market Capitalization” also known as “Market cap” is the aggregate valuation of the company based on its current share price and the total number of outstanding shares. It is calculated by multiplying the Total Outstanding shares of a company with its Current Market Price.

 Market Capitalization= Total number of Outstanding Shares of a company * Current Market Price per share

Outstanding Shares: Outstanding shares represent the total number of shares issued by a company, including the shares that can be traded by the public, shares held by Institutional Investors, and shares owned by the company officers and insiders.

Market capitalization is an easy and quick way to estimate a company’s worth in the market. Two factors that directly impact the Market Cap of the company are:

• • Market Price: If the Current Market Price of the stock increases, then Market Cap also increases and vice versa.
  • Total Number of Shares Outstanding: A company can increase its Market Capitalization by introducing New Shares or decrease them by buy-back. With the increase/decrease in the total number of outstanding shares, the market capitalization can go up/down.

For Example, Company XYZ has 50,000 outstanding shares in the market. The Market price per share is Rs. 100/-. In this case, the Market Cap of the company would be:

Market Cap: 50,000 shares *100 = Rs.50,00,000 or Rs. 50 Lakhs. Assuming the Market price per share of the company jumped to Rs. 125 per share. In this case, the Market Cap of the company would be:

Market Cap: 50,000 shares *125 = Rs.62,50,000 or Rs. 62.50 Lakhs.

Based on the Market cap, companies are categorized into:

• • Large-Cap companies: Having a Market cap of Rs. 20,000 Crore or more.
  • Mid-Cap companies    : Having a Market Cap above Rs. 5,000 but less than Rs. 20,000 Crores.
  • Small-Cap Companies: Having a Market cap below Rs. 5,000 Crores.
  • Micro-Cap companies: Having a Market Cap of less than Rs. 3,500 Crores.

Advantages of Market Capitalization:

• • It helps the investor understand and compare the relative size of one company to another, thus assisting them in making an investment decision.

Limitations of Market Capitalization:

• • Market capitalization uses the current market price and outstanding shares of a company to evaluate the worth of any company. Both the factors are variable, therefore, it fails to depict the correct value of a company. A major change in one factor can impact the market cap of a company drastically.