Chicks, Chat and Change Financial Terminology 101

Welcome back. I am Ann Zuraw

We are continuing on with our Financial Terminology 101 and keeping it very simple and general.

Today we are going to talk about what Market Capitalization or Market “Cap” is. Market Cap is one measure by which a company’s size is classified. Market cap is a way to use the stock price to establish the value of a company. The way the Market Cap is calculated is by multiplying the stock price by the number of shares of stock the company has actually issued.

For example, your cake company has issued 10,000 stock shares and each share is selling for $10. You would multiply the 10,000 shares by the $10 stock price and have a market capitalization of $100,000. What this means is that if you had the money and all of the stockholders were willing to sell you their shares, you could buy that company for $100,000.

Market Cap doesn’t necessarily have anything to do with the actual value of the company assets. What it does do is put a value on the ownership which includes all the assets of the company plus any future profits that are expected. It’s possible to have a company that doesn’t own any assets but has a great idea for making money. Google is a good example. They have a market cap much higher than their assets because their investors are assuming the company will be able to increase its profits at a fast pace.