The term Market Capitalization is the total value of the outstanding shares of a company. It is also known as company’s capitalization. The same can be derived from the following formula:
Market Capitalization = Current price per share x Outstanding shares
Let’s make it easier by taking an example. If a company has 9,00,000 outstanding shares of INR 100 each, then according to the above formula, the market capitalization of that company is 9,00,000 x 100 i.e. INR 9,00,00,000.
Significance of Market Capitalization
It is one of the most essential attributes that assists the investors in determining the risk involved and the returns in the share. It also guides the investors in choosing the stock based on their diversification and risk criteria.
It is important to understand that market capitalization is not synonymous to the to the value of equity OR the sum of shareholder’s equity and company’s debt.
It is a measure of the size of the company rather than the worth of it. It represents the cost of purchasing all the shares of a company and not the worth of a company. If an investor out-rightly buy a company, he needs to look at the enterprise value and not market capitalization.
