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What is a Market Capitalization? And why it’s important?
Market Cap: What is it?
Market capitalization, commonly abbreviated to ‘market cap’, is a key factor for investors to consider. It is essential for investors to understand the calculation of market cap, as well as its significance when performing fundamental research on stocks and cryptocurrencies.
Why it is important?
Market capitalization is a fundamental barometer of the success of a corporation, representing the total equity value of the company’s shareholders. It is paramount to consider when attempting to analyze the fundamentals of a stock, as it provides a context for per-share figures such as price-to-earnings multiples.
Other absolute figures such as free cash flow or EBITDA also require an understanding of the company’s market cap in order to be properly assessed.
Market capitalization is an essential tool for providing perspective on a stock’s pricing. A low price per share doesn’t necessarily indicate that a stock is a bargain. For instance, a stock could have a share price of $3, but if there are 1 billion shares outstanding, the company’s market cap could be extremely high.
The same is true in the realm of cryptocurrency. A token may have a tiny price tag in terms of dollars, but if its circulating supply is in the billions, the market cap could be in the billions as well.
At the end of the day, the goal of being a public company or developing a digital asset is to maximize market cap. Therefore, investors will need to understand what the market cap is in order to make informed decisions about which companies to invest in.
How to calculate a Market Cap?
In the world of stocks, market capitalization is determined by taking the total number of outstanding shares and multiplying it by the stock’s price. If a company has 1 million shares, and the stock is priced at $100, its market capitalization is $100 million.
In the crypto world, market capitalization is calculated the same way: multiplying the coin price by the total number of circulating coins. Here, circulating coins refer to the number of coins currently available, not the maximum amount of coins that can be produced. For example, Bitcoin has a maximum supply of 21 million but not all of those coins have been mined yet.
Does Market Cap affect stock price?
The stock price influences the market capitalization, not the other way around. Market capitalization is calculated by multiplying the number of outstanding shares by the stock price. Therefore, the stock price is the driving force behind changes in the market cap.
Free Float Market Cap: What is it?
Free float market capitalization is determined by considering only the number of shares available to be traded on the open market. This excludes any shares held by governments, executives, or similar entities that may be unable to transfer their holdings.
Free float market capitalization is not usually used in fundamental analysis. It is more commonly employed by index providers and is not usually a problem in the U.S., where less than 10% of shares are excluded from the calculation.
Fully-Diluted Market Cap
Fully-diluted market capitalization can be a significant part of stock analysis. The market capitalization of a company is calculated using its existing shares of stock. However, there are certain interests in the company that are not yet included among the outstanding shares.
These potential shares could eventually be released and added to the number of outstanding shares, which would reduce the percentage of ownership of existing shareholders. A common example of this is stock options that have been granted to executives.
These options may be “in the money”, meaning that the executives can use them to purchase the stock for less than the current market price. But they may not be available to be used yet, usually because a certain amount of time has not passed.
FAQs
What is a Market Cap in Crypto?
The market capitalization of a cryptocurrency is determined by the total worth of all the coins in circulation. It is analogous to the market capitalization of a stock, which is the sum of its share price multiplied by the number of shares outstanding.
Is Market Cap the same as Valuation?
An investor might say, for instance, that a stock has an attractive market value. This statement refers specifically to the company’s capitalization and does not address any other fundamental aspects of the stock. To be clear, it is better to use the accurate term “market cap” rather than the more ambiguous “valuation”.
