What is 'Equity Market Capitalization'

Equity market capitalization measures the total market value of an equity market. The measure is calculated by taking the market capitalization of all companies in the equity market and adding them together to arrive at the capitalization for the market as a whole.

BREAKING DOWN 'Equity Market Capitalization'

Equity market capitalization is used to compare the increase or decrease in the size of the market as a whole. The measure is also used to compare the value of the equity market to other segments of the economy, such as the value of the real estate market.

Market capitalization refers to the total dollar market value of a company's outstanding shares. Commonly referred to as "market cap," it is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size.

Using market capitalization as a basis for determining the size of a company, and a market as a whole, is important because company size is a basic determinant of various characteristics in which investors are interested, including risk. It is also easy to calculate. For example, a company with 20 million shares selling at $100 per share would have a market cap of $2 billion.

Limitations of Equity Market Capitalization

Although it is used often to describe the size company, market cap does not measure the equity value of a company. Only a thorough analysis of a company's fundamentals can do that. It is inadequate to value a company because the market price on which it is based does not necessarily reflect how much a piece of the business is worth. Shares are often overvalued or undervalued by the market, meaning the market price determines only how much the market is willing to pay for its shares. 

Although it measures the cost of buying all of a company's shares, the market cap does not determine the amount the company would cost to acquire in a merger transaction. A better method of calculating the price of acquiring a business outright is the enterprise value

Two primary factors can alter company's market cap: significant changes in the price of a stock or when a company issues or repurchases shares. An investor who exercises a large number of warrants can also increase the amount of shares on the market and negatively affect shareholders in a process known as dilution.  Because of these factors, equity market capitalization, which is a composite sum of all the market caps of all equities in a market, is not a good measure for ascertaining the value of an equity market...only the size.

 

RELATED TERMS
  1. Equity

    Equity is the value of an asset less the value of all liabilities ...
  2. Equity Fund

    An equity fund is a type of fund that uses investors' capital ...
  3. Share Capital

    Share capital refers to funds raised by issuing shares in return ...
  4. Position Sizing

    Position sizing refers to the number of units invested in a particular ...
  5. Capitalization

    Capitalization, in accounting, is when the costs to acquire an ...
  6. Asset Valuation

    Asset valuation is the process of determining the fair market ...
Related Articles
  1. Investing

    Market Capitalization Defined

    Find out the differences between mega-, large-, mid- and small-cap stocks and how each suits different investing styles.
  2. Investing

    The Difference Between Enterprise Value and Equity Value

    Enterprise value calculates a business’s current value, while equity value offers a snapshot of that business’s current and potential future value.
  3. Investing

    What Are Market Cap Mutual Funds?

    Mutual funds that target specific market capitalization levels offer unique benefits to investors and market timers. Learn which which mutual fund market cap suits you.
  4. Investing

    An Introduction To Small Cap Stocks

    Get an introduction to small cap stocks, and learn why when it comes to a company's size, bigger isn't always better for investors.
  5. Investing

    UPS Stock: Capital Structure Analysis

    Analyze UPS' capital structure to determine the relative importance of debt and equity financing. Identify the factors influencing financial leverage trends.
  6. Investing

    Understanding Verizon's Capital Structure (VZ)

    Verizon has a highly leveraged capital structure, and this debt capitalization and the company's equity have affected its enterprise value.
  7. Investing

    What's a Small Cap Stock?

    The “cap” in small cap stocks refers to a company’s capitalization as determined by the total market value of its publicly traded shares. Small cap stocks are generally defined as the stock of ...
  8. Small Business

    Explaining Cost Of Capital

    Cost of capital is the cost of funds used to finance a business.
  9. Investing

    Financial markets: Capital vs. Money Markets

    There are several key differences between capital markets and money markets as components of financial markets. Check out the similarities and differences between the two markets.
RELATED FAQS
  1. What is the difference between market capitalization and market value?

    Understand the difference between market capitalization and market value, including the elements used for the calculation ... Read Answer >>
  2. What is the difference between enterprise value and equity value?

    Valuating a business accurately depends heavily on the purpose of the valuation. Learn how enterprise value and equity value ... Read Answer >>
  3. What are the components of shareholder equity?

    Understanding company valuation figures, such as shareholder equity, is crucial in assessing a business. Read Answer >>
  4. How does a company choose between debt and equity in its capital structure?

    Learn about the benefits and drawbacks of debt and equity financing. Find out how to compare capital structures using cost ... Read Answer >>
  5. How does market risk affect the cost of capital?

    Find out how market risk directly affects the total cost of capital, including how to use the capital asset pricing model ... Read Answer >>
Trading Center