Market capitalization is a measure of a company's weight in the market and provides an idea of the level of risk it represents.
"[...]The value, at the market price, of all the securities representing a company. It is equal to the number of shares in circulation multiplied by the share price" : this is how the INSEE (Institut national de la statistique et des études économiques) defines market capitalization, a key element in investors’ decision-making process.
Here is a complete summary of everything you need to know about market capitalization, helping you better understand the place and weight of companies in the financial markets.
The market capitalization of a company is the total number of shares issued valued at their market price.
This figure makes it possible to estimate the weight and importance of a company on the market. Market capitalization varies over time, and is used to assess the investment risks of a given company. Theoretically, its amount represents the price of buying back all the shares outstanding on the financial markets.
In concrete terms : Market capitalization = share price x number of shares
An investor wishing to acquire 100% of the shares issued by a company on the financial markets would have to pay more than the amount of its market capitalization. Shareholders may be reluctant to sell their shares, meaning an additional amount has to be paid by the investor. This is known as a control premium. Furthermore, control of a company does not require ownership of 100% of its market capitalization : half plus one is enough to be a majority shareholder and have power over the company.
Please note : buying a company is actually very rare.
If we assume that efficient market theory is valid, then we can identify two criteria that influence the market capitalization of a firm :
It is important to distinguish between market capitalization and company value. The value of a company includes not only its market capitalization, but also its financial debt, i.e. the money invested by lenders. Thus, a company with debt will see its total value exceed its market capitalization.
There is no official definition to classify the level of market capitalization of a company.
However, most investors agree that there are six main tiers that provide an idea of a company's market weight :
These thresholds, regardless of currency, must be adjusted according to the current inflation rate in order to be legitimate.
Good to know : the terms mega-cap, micro-cap and nano-cap came later in the investment jargon to encompass more companies.
To give you an idea of where the largest market capitalizations will be in the financial markets in 2020, here is a brief ranking :
Market capitalization gives a precise idea of the weight of a company on the financial markets. Although it should be distinguished from the value of a company, market capitalization gives investors an idea of the level of confidence they can have in a company.