Capitalization Definition – What is Market Cap? | CFI

capitalization (market cap)

Capitalization, otherwise known as ‘market cap” from a financial perspective, refers to the market value of the outstanding shares of a company that trades openly. At the same time, it can then serve as a measurement of the company’s net worth via the public eye. It can also then be used as a form of stock valuation for the company in question.

 

The market cap valuation is calculated by multiplying the outstanding shares with the current stock price, but this only refers to the equity value of the company. Several other techniques can be applied as a method of determining the market cap valuation; some of these include the theoretical approach as well as estimation using comparable factors.

 

The investment community uses [market capitalization] to classify companies according to their size. Initially, companies were classified as small-cap, mid-cap, and large-cap. Subsequently, the terms have now expanded to also include micro-cap and mega-cap and in some instances also nano-cap.

 

Market experts suggest that the best approach for an investor is to hold a balanced and diverse portfolio of blended market caps as this will produce more favorable results and also provide the investor with valuable knowledge at the same time. However, by no means does a diversified portfolio serve as a shield to mitigate risk or curb potential losses.

 

Key takeaways:

  • Capitalization is more commonly known as market cap and refers to the market value of the outstanding shares of a company that trades on the open market.
  • Market cap is calculated by multiplying the outstanding shares with the current stock price.
  • Small-cap, mid-cap, large-cap, micro-cap, mega-cap, and nano-cap are market-cap categories.
  • The best practice from industry experts is to have a diverse portfolio by mixing different market caps.
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