Market capitalization is one of the most used methods to determine the size of a company. In this article we will see the definition, the calculation, examples and the classification of companies according to their market capitalization.
Definition of stock market capitalization
The market capitalization (in English “market capitalization”) is the total market value of a company. In other words, it is the money that would have to be paid to buy the entire company if we bought it at the current market price.
Calculation of market capitalization
Market capitalization is calculated by multiplying the price of each share by the total number of shares a company has. The formula is as follows:
Capitalization = Price per share x Number of shares
Example of calculating market capitalization
The shares of a company trade at a price of € 12 per share. The total number of shares issued by the company is 25 million. Therefore, its market capitalization will be:
Capitalization = 12 x 25 million = 300 million euros
Classification of companies by their capitalization
It is very common to classify companies by their market capitalization. The classic classification divides companies into 3 groups: large caps, mid caps and small caps, although today other concepts such as mega caps and micro caps and even nano caps have been included in this classification.
In the following table we can see this classification according to the market capitalization in dollars:
Classification of companies by their market capitalization
As we can see, nano caps are a subdivision within micro caps and mega caps are another subdivision within large caps.
In future articles we will see other ways to measure the size of companies that take account of the characteristics of their balance sheet.