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Large Cap

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Last Sourced: 2021-02-01
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Market capitalization

Market capitalization, commonly called market cap, is the market value of a publicly traded company's outstanding shares.

Market capitalization is equal to the share price multiplied by the number of shares outstanding. Since outstanding stock is bought and sold in public markets, capitalization could be used as an indicator of public opinion of a company's net worth and is a determining factor in some forms of stock valuation.

Market cap reflects only the equity value of a company. A firm's choice of capital structure has a significant impact on how the total value of a company is allocated between equity and debt. A more comprehensive measure is enterprise value (EV), which gives effect to outstanding debt, preferred stock, and other factors. For insurance firms, a value called the embedded value (EV) has been used.

Market capitalization is used by the investment community in ranking the size of companies, as opposed to sales or total asset figures. It is also used in ranking the relative size of stock exchanges, being a measure of the sum of the market capitalizations of all companies listed on each stock exchange. In performing such rankings, the market capitalizations are calculated at some significant date, such as June 30 or December 31.

The total capitalization of stock markets or economic regions may be compared with other economic indicators. The total market capitalization of all publicly traded companies in the world was US$51.2 trillion in January 2007 and rose as high as US$57.5 trillion in May 2008 before dropping below US$50 trillion in August 2008 and slightly above US$40 trillion in September 2008. In 2014 and 2015, global market capitalization was US$68 trillion and US$67 trillion, respectively.

Calculation

Market cap is given by the formula , where MC is the market capitalization, N is the number of shares outstanding, and P is the closing price per share.

For example, if a company has 4 million shares outstanding and the closing price per share is $20, its market capitalization is then $80 million. If the closing price per share rises to $21, the market cap becomes $84 million. If it drops to $19 per share, the market cap falls to $76 million. This is in contrast to mercantile pricing where purchase price, average price and sale price may differ due to transaction costs.

Not all of the outstanding shares trade on the open market. The number of shares trading on the open market is called the float. It is equal to or less than N because N includes shares that are restricted from trading. The free-float market cap uses just the floating number of shares in the calculation, generally resulting in a smaller number.

Market cap terms

Traditionally, companies were divided into large-cap, mid-cap, and small-cap. The terms mega-cap and micro-cap have also since come into common use, and nano-cap is sometimes heard. Different numbers are used by different indexes; there is no official definition of, or full consensus agreement about, the exact cutoff values. The cutoffs may be defined as percentiles rather than in nominal dollars. The definitions expressed in nominal dollars need to be adjusted over decades due to inflation, population change, and overall market valuation (for example, $1 billion was a large market cap in 1950, but it is not very large now), and market caps are likely to be different country to country.


Further Reading


The behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and CanadaThe behaviour of small cap vs. large cap stocks in recessions and recoveries: Empirical evidence for the United States and Canada
www.sciencedirect.com [PDF]
This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over …

The time-varying nature of the link between REIT, real estate and financial asset returnsThe time-varying nature of the link between REIT, real estate and financial asset returns
www.aresjournals.org [PDF]
This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over …

Growth versus value and large-cap versus small-cap stocks in international marketsGrowth versus value and large-cap versus small-cap stocks in international markets
www.tandfonline.com [PDF]
This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over …

US stocks in the presence of oil price risk: Large cap vs. Small capUS stocks in the presence of oil price risk: Large cap vs. Small cap
dialnet.unirioja.es [PDF]
This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over …

The end of behavioral financeThe end of behavioral finance
www.tandfonline.com [PDF]
This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over …

Equity-style timing: A multi-style rotation model for the Russell large-cap and small-cap growth and value style indexesEquity-style timing: A multi-style rotation model for the Russell large-cap and small-cap growth and value style indexes
link.springer.com [PDF]
This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over …

Data envelopment analysis of Morningstar's large-cap mutual fundsData envelopment analysis of Morningstar's large-cap mutual funds
joi.pm-research.com [PDF]
This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over …

Financial Indices Modelling and Trading utilizing Deep Learning Techniques: The ATHENS SE FTSE/ASE Large Cap Use CaseFinancial Indices Modelling and Trading utilizing Deep Learning Techniques: The ATHENS SE FTSE/ASE Large Cap Use Case
ieeexplore.ieee.org [PDF]
This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over …

Financial integration and the price of world covariance risk: Large-vs. small-cap stocksFinancial integration and the price of world covariance risk: Large-vs. small-cap stocks
www.sciencedirect.com [PDF]
This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over …

International diversification with large-and small-cap stocksInternational diversification with large-and small-cap stocks
www.jstor.org [PDF]
This paper examines the relative performance of small-caps vs. large caps surrounding periods of peaks and troughs of economic activity, and reexamines the relationship between the small firm anomaly and the business cycle. Small-cap firms outperform large caps over …



Q&A About Large Cap


What is market capitalization?

Market capitalization is the market value of a publicly traded company's outstanding shares.

Is there an alternative to market cap that includes debt in its calculation?

Enterprise Value (EV) takes into account all sources of financing, including debt and preferred stock, when calculating the total value of a firm.

What are some other factors included in EV calculations for insurance companies?

Embedded Value (EV) takes into account intangible assets such as goodwill and brand recognition when calculating the total value of a firm.

Does market cap only reflect equity value or does it include debt as well?

Market cap reflects both equity and debt values.

What does market cap reflect?

Market cap reflects only the equity value of a company.

Who uses market cap in ranking companies?

The investment community uses market cap in ranking companies.

How do you calculate market cap?

Market cap = share price x number of shares outstanding.

How does enterprise value differ from market cap?

Enterprise value gives effect to outstanding debt, preferred stock, and other factors.

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