Market capitalisation

Market capitalisation (market cap) is the total value of the shares of a company, sector or market.

If a company has only one type of share its market cap is simply the share price multiplied by the number of shares. If a company has more than one class of share then the market cap is the sum of the market caps of the different types of shares. In either case it is the value of the company at current share prices, or alternatively the cost of buying the company at current prices.

Market caps are also calculated for sectors and stock markets in order to compare sizes and as part of the process of calculating indices.

Market cap is not the only measure of the size of a company. Its most obvious weakness is that it only looks at the value of equity, whereas in reality the debt holders have a claim on the company that needs to be taken into account. This means that investors often find enterprise value, and related valuation ratios, to be more relevant.

Measures of size based on sales or value added can also be useful.

Market cap is also used for valuation: any valuation ratio that uses share price (PE, price/sales, price/cash flow etc. can be restated in terms of market cap). It is also used as an intermediate step in sum-of-parts valuations.

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