What is Market Capitalization Formula?
The Market Capitalization formula calculates the total equity value of the company and is found by multiplying the current market price per share of the company with the total number of outstanding shares.
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Source: Market Capitalization Formula (wallstreetmojo.com)
To use the Market Cap formula, you need to know two things about the company and its stocks:
- At first, we have to know how much the company’s current share’s selling price on the stock market. The price is not constant and will vary every day and sometimes several times a day. We can get the value from the money control website.
- Secondly, we need to know the number of shares outstanding in the marketShares Outstanding In The MarketOutstanding shares are the stocks available with the company's shareholders at a given point of time after excluding the shares that the entity had repurchased. It is shown as a part of the owner's equity in the liability side of the company's balance sheet.read more. The number of shares will vary from company to company. Some large companies sometimes split their sharesSplit Their SharesStock split, also known as share split, is the process by which companies divide their existing outstanding shares into multiple shares, such as 3 shares for every 1 owned, 2 shares for every 1 held, and so on. The company's market capitalization remains unchanged during a stock split because, while the number of shares grows, the price per share decreases correspondingly.read more to increase the number of shares. Therefore the price of each share decreases due to the increase in the number of shares.
Then we calculate the market cap formula by multiplying the current share price by the number of outstanding shares.
Examples of Market Capitalization Formula (with Excel Template)
Let’s see some simple to advanced examples of Market cap formula to understand it better.
Example #1
A Company ABC has a total of 20,000,000 shares outstanding and lets us suppose the current share price is $ 12.
Based on the above-given information and the formula of Market Cap, we will be able to calculate that ABC Company’s market capitalization.
- Market Capitalization Formula = 20,000,000 x $ 12 = $ 12 million.
We must also remember that not all shares traded in an open market. The shares which are available in the open market are called float.
Example #2
Let’s see an example of Kirloskar Oil Engines Limited for the calculation of the market cap.
#1 – First, we will find out the current stock price of the company from the Money control site.
Source – https://www.moneycontrol.com/
So we see the current price is 179.00 (BSE) as of date 29th Jan’19.
- Current Price=179.00
#2 – Secondly, we need to know the number of shares that are selling on the stock market. We can get that from the balance sheet of the company from the Money control site.
In the Money control website, we easily calculate the total outstanding shares as they divide the share capitalShare CapitalShare capital refers to the funds raised by an organization by issuing the company's initial public offerings, common shares or preference stocks to the public. It appears as the owner's or shareholders' equity on the corporate balance sheet's liability side.read more into Equity share capital and preference share. We can find both under the share capital in Money control.
Now we will find out the total outstanding shares of Kirloskar Oil Engines Limited. If the company has issued only equity shares, then we can calculate outstanding shares by simply dividing share capital by its face value.
The share capital is Rs 28.92 Cr, as in the fig below as of March’18.
Source- https://www.moneycontrol.com/
The face value can also be taken from the Money control website.
Source – https://www.moneycontrol.com/
The face value is Rs 2.
Therefore we can calculate outstanding shares as
- Outstanding shares = 28.92/2
- = 14.46
Therefore, from the above, we have gathered the following information for the calculation of Market Cap.
So, the calculation of Market Cap will be as follows –
- Market Capitalization Formula = 14.46*192.95
Market Capitalization will be-
- = Rs 2588.3400 Cr
Example #3
Let’s see an example of ITC Ltd for the calculation of the market cap.
#1 – First, we will find out the current stock price of the company from money control (BSE).
Source: https://www.moneycontrol.com/
So we see the current price is Rs 275.95 as of date 29th Jan’19.
- Current Price = Rs. 275.95
#2 – Secondly, we need to know the number of shares that are selling on the stock market. We can get that from the balance sheet of the company from the Money control site.
In the Money control website, we easily calculate the total outstanding shares as they divide the share capital into Equity share capital and preference share capital. We can find both under the share capital in Money control.
Now we will find out the total outstanding shares of ITC Ltd. If the company has issued only equity shares, then we can calculate outstanding shares by simply dividing share capital by its face value.
The share capital is Rs 1,220.43 Cr, as in the fig below as of March’18.
Source- https://www.moneycontrol.com/
The face value can also be taken from the Money control website.
Source: https://www.moneycontrol.com/
Therefore, the face value is Rs 1.
Therefore we can calculate outstanding shares as
- Outstanding shares = 1220.43/1
- = 1220.43
Therefore, from the above, we have gathered the following information for the calculation of Market Cap.
So, the calculation of Market Cap will be as follows –
- Market Capitalization Formula= 1220.43*275.95
Market Capitalization will be-
- = Rs 336777.659 Cr.
Relevance and Use
The market capitalization Formula is the main component when we want to assess a stock because we can calculate the value of the company from it. The market capitalization formula gives us the total value of the company.
The market capitalization Formula allows us to compare companies of a similar industry. The market divides the stock into three main categories.
- Small-Cap– Small-cap stocks are usually start-ups companies that are currently in the development stage. As for the investors, these usually have small to high-risk investmentsHigh-risk InvestmentsA high-risk investment is an investment where the degree of risk is high, and there is a huge possibility that an investor may lose a substantial/all the amount invested. Such investments shall be made by investors who have a high-risk appetite since the chances of underperformance are higher than the usual.read more.
- Mid Cap– Investments in mid-capMid-capMid-Cap stocks are the stocks of the companies having medium market capitalization. Their capital lies between that of large and small cap companies and valuation of the entire share holdings of these companies range between $2 billion to $8 billion.read more companies are usually less risky than the small-cap ones. They have a tremendous scope of growth and can return a good investment in 3-5 years’ time.
- Large Cap– Large Cap stocks usually have a safe return as the companies have a good market presence.
Therefore market cap formula helps the investors to understand the returns and risks in the share and also helps them to choose their stock wisely, which fulfills their criteria of risk and diversification.
We must also remember that the market cap formula only reflects the equity value of a companyEquity Value Of A CompanyEquity Value, also known as market capitalization, is the sum-total of the values the shareholders have made available for the business and can be calculated by multiplying the market value per share by the total number of shares outstanding.read more. The enterprise value of the company is a better method as it reflects debt, preferred stock.
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