Market CapitalizationFinancial Dictionary -> Investing -> Market Capitalization
Here is an example of the full calculation in action:
If a company has 40 million shares outstanding, each having a market value of $100, the company's market capitalization would be $4 billion, because (40,000,000 x $100 per share is $4 billion).
This gives investors an indication of the company's net worth without looking at sales revenue or a company's assets, and is one of the factors that go in to valuing its stock.
Depending on this figure, companies are referred to as small cap, mid cap, large cap or even mega cap; more specifically:
A company is Large Cap at $10 billion plus,
Mid Cap: $2 billion to $10 billion, and
Small Cap: Less than $2 billion.
Mega Cap is considered 200 billion or greater and only large corporations reach this level.
Despite this different numbers are used by different market indexes and there isn't really any official definition of or general agreement about the exact cutoffs. They do however usually fall within the above range. Against popular belief, just because a company has a high stock price doesn't mean the company itself is large.
When looking at market capitalization, only free float shares are considered. Any family, personal, governmental shares, or shares owned by the founder or director of the company are generally ignored, because they have little effect on the market.