# Market Capitalization Calculation – Stock Valuation Formula

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Market Capitalization = Shares times Price of Stock

The market capitalization calculation is an important and useful stock valuation formula. Market capitalization (sometimes called market cap) is the total market value of all the company’s outstanding shares. This represents the value the market has placed on a company’s equity.

## Market Capitalization Calculation

Market Capitalization = Number of shares outstanding multiplied by the price of the stock.

## Why is this Stock Valuation Formula Important?

The market capitalization is the valuation the market is giving the equity of the company. When investors purchase a stock they are buying a fractional share of the whole company. Therefore, market capitalization represents the total price they would be paying for all of a company’s stock.

Market capitalization provides a metric with which to compare profits, cash flows, revenues, expenses, assets, debt, etc.  Remember, owning a stock represents a fractional ownership of the company.  Market capitalization is the current value at which you can buy and sell your fractional share of the company. This makes it a relevant and important measurement in investment analysis.

## Market Cap Categories

Market capitalization categories are guidelines used to describe and segment stocks with various market valuations.

### Mega Cap

Over \$200 billion. These are usually blue chip companies with excellent track records.

### Large Cap

\$10 – \$200 billion. Mostly well established companies with well known products.

### Mid Cap

\$2 – \$10 billion. Many growth companies are in this category. Possible higher returns but generally greater risk than larger companies.

### Small Cap

\$300 million – \$ 2 billion. Many small caps are younger companies with high growth potential and high risk.

### Micro Cap

\$50 million – \$300 million. Smaller companies with little wall street coverage. These stocks require tremendous due diligence before investing.

## Using Market Capitalization to Calculate the Total Value of a Company

Market capitalization is the total value of the company’s equity.  If you want to know the total value of a company; enterprise value takes market capitalization one step further by adding total debt and subtracting cash. This gives an investor a glimpse of the quality or risk of the company’s balance sheet.

Related Reading: Investment Analysis: High Probability Strategies

#### Written by KenFaulkenberry

AAAMP Blog by Ken Faulkenberry
Ken Faulkenberry earned an MBA from the University of Southern California (USC) Marshall School of Business with an emphasis in investments. Ken has 25 years of investment experience and is dedicated to helping people with self-directed investment management through the Arbor Investment Planner. His asset allocation strategies have an outstanding performance record.
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