Market capitalization is the aggregate market value of a company's outstanding shares. This figure is determined by multiplying the number of outstanding shares by the current market price for one share. For example, a business with 1,000,000 shares outstanding and a current market price per share of $15 has a market capitalization of $15,000,000.
The market capitalization concept only works well when a company's shares are publicly traded on a stock exchange, since it requires a significant amount of trading volume to arrive at a reasonable determination of the value of a business. Conversely, if a company's shares are thinly traded, the current market price could gyrate wildly based on a small number of recent sale transactions. The concept is least effective when a business has a small number of investors and its shares are not registered for sale with the Securities and Exchange Commission; in this case, no market value can be established, so some other valuation technique must be used.
Publicly-held companies are ranked based on their market caps, which are as follows:
Large cap companies = $10+ billion market cap
Mid-cap companies = $2+ to $10 billion market cap
Small-cap companies = $300 million to $2 billion market cap
Nano-cap companies = Up to $300 million market cap
Companies ranked towards the top of this scale have typically been in operation for many years, have secure cash flows and steady returns. Their share prices tend not to fluctuate to a significant degree. Companies ranked towards the bottom of this scale tend to have been in business for a shorter period of time, operate in smaller market niches, and have more uncertain cash flows. Their shares prices can vary substantially.
Market capitalization is also known as market cap.