Market Capitalization: Definition & Formula

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  • 0:04 Market Capitalization
  • 0:47 Formula
  • 2:26 Example
  • 3:21 Lesson Summary
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Lesson Transcript
Instructor: Yuanxin (Amy) Yang Alcocer

Amy has a master's degree in secondary education and has taught math at a public charter high school.

In this lesson, you'll learn that the cost per share of stock does not determine the size of the company. Large companies can have stocks that cost less than smaller companies, which is related to a company's market capitalization.

Market Capitalization

This lesson is about market capitalization, how it's calculated, and what it means for companies. By definition, a company's market capitalization is how much the company is worth as determined by the stock market. The stock market is where public companies sell their stock to individuals. This stock market is able to change the value, the market capitalization, of a company just by changing the amount that each share of stock in the company will sell for. How much the stock of a certain company sells for is dependent on how much the public thinks the company is worth. If the public doesn't think the company is worth much, then that company's stock prices will drop. On the other hand, if the public views the company as worth a lot, then that company's stock prices will rise. But, this price alone is not an indicator of the worth of a company.

Formula

There is a formula you can use to calculate a company's market capitalization based on the price of that company's stock on the stock market. This formula uses the cost of the company's stock and the number of shares the company is selling on the stock market.

  • (Market capitalization) = (Cost per share) x (Number of shares)

To use this formula, you need to know two things about the company and its stocks:

  • 1. You need to know how much the company's stock is currently selling for on the stock market. This changes all the time. A company's stock can change prices several times a day. It all depends on what people are willing to pay.
  • 2. You need to know how many shares the company is selling on the stock market. Some companies have just a few hundred for sale, while others have thousands for sale. Companies can also split their stocks to create even more shares for sale. When this happens, the price of each share drops to account for the increase in the number of shares. This is where a large company with a large number of stocks can have a stock that is cheaper to buy than a small company with a small number of stocks.

Let's take a look at some numbers.

A large pet supply company has 100,000 shares available for sale on the stock market. The current price per share is $15.13. What is the market capitalization of this business?

This problem gives you the two key things you need to know: the number of shares and the cost per share. Knowing these, you can plug these into the formula and evaluate to find your answer:

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