When people reference a business's market cap, why are they referring to the value of the business as a whole?
Doesn't market cap just represent the value of the outstanding shares and not the company as a whole? If companies only issue a small percent of their business value in stock, then doesn't that mean the market cap is only the value of a certain percentage of a business and not the whole firm?
Market capitalization represents the value of all outstanding shares, whether or not they are all publicly traded. It's the number of outstanding shares times the market price of each share. When companies offer their shares to the public, the offerings include only a portion of the total number of shares outstanding. Those not offered are usually held by those who made the initial investments in the company. Even so, market cap is the current market value of the whole firm.
Market cap or market capitalization is the total market value of a company's outstanding shares of stock.
To calculate market capitalization, take the total number of a company's stock shares outstanding and multiply that figure by the stock's market price.
A company can issue new shares of stock to increase its market capitalization, however a stock split will not affect a company's market capitalization, even though it will increase the total shares outstanding.
Market caps by size:
- Mega-cap companies have a market cap in excess of $200 billion
- Large-cap companies have a market cap of $10 billion to $200 billion
- Mid-cap companies have a market cap of $2 billion to $10 billion
- Small-cap companies have a market cap of $300 million to $2 billion
- Micro-cap companies have a market cap of $50 million to $300 million
Large-cap companies generally have more assets and capital than small-cap companies, so they are often considered to be a lower-risk investment than small-cap companies. Whereas, small-cap companies may have the potential for greater grow than large-cap companies.
The price of an individual share of stock does not tell us how much its issuing company is worth. It tells us the current price to buy a piece of that company. It is possible for a company with a lower stock price to have a larger market cap than one with a higher stock price.
Market capitalization is a term used in connection with public companies and is calculated as the share price multiplied by the number of shares outstanding, which includes shares that are 'floating' as well as closely held.
Shareholders in aggregate own 100% of the company whether all shares trade on the stock exchange or not. In general, if a company is public then all ownership of the company is through ownership of the stock (Only)ie a company cannot be part public and part private.
Founders and certain large owners of the stock (Closely held shares in aggregate) may reduce the float ie the % of outstanding shares that is owned by the public and available for trading
This is a very good question. The market cap is a measure of the market value of the equity of the business, but it has some limitations as you suggest. First, it is based off of a marginal stock price, thus, the last trade of the day multiplied by the outstanding shares gets you market cap. But, as we know, if you were to sell a lot of shares, the price would likely fall in order for the market to clear, and if you were to buy the whole company, you would need to pay a premium to get control. Thus, there are liquidity discounts and control premia that need to be factored into a true valuation of the company. Second, as far as the value calculation is concerned, the number of shares shouldn't have any bearing on what the company is worth. Valuation is based off of the value of the future cash flows of the business. It is then divided by the number of shares to get a stock price, not the other way around. If there are stock options outstanding, when they are exercised they will increase the number of outstanding shares and will generally cause dilution to the current shareholders, but equity value will generally stay the same. If you increase the number of shares by selling new shares in the market, you will receive the new capital in exchange which will increase the market cap by approximately that amount of cash. What this means is that the market cap is a good approximation of what buyers and sellers think a minority interest in the equity of a business is worth at a point in time. We see from the world of M&A that buyers generally need to pay a premium to acquire a whole business. And in the case of M&A, buyers tend to think in terms of enterprise value, which is the market cap plus debt, less cash. If you are looking to get a better sense of the value of the whole firm, enterprise value is a better place to start. Market cap will give you a reasonable approximation of what the firm's equity is worth at a point in time, subject to the limitations (and others) mentioned above.
The outstanding shares each represent a part-ownership interest in the business. If you owned all of the outstanding shares you would own 100% of the company. Therefore, the market cap (stock price times outstanding shares) represents the market value of the company.
Often, the publicly-traded float is only a fraction of total outstanding shares and the rest of the shares are closely held by founders, or held in the company treasury. But market cap is calculated using total shares issued and outstanding.