Market capitalization, or "market cap" to the savvy, is a quick way of placing an approximate price tag on a company. Just multiply the stock price by the number of shares outstanding. For example, if Excelsior Hair Growth (ticker: SPROUT) has 10 million shares outstanding priced at $50 each, its "market cap" is $500 million.
People often refer to several categories of market capitalization. There are no strict guides as to what defines each one. Estimates vary and change over time, but here's one rough take: If a company's capitalization is $5 billion or higher, call it a large cap; between $1 billion and $5 billion, a mid cap; $250 million to $1 billion, a small cap; and less than $250 million, a micro cap. If small-cap SPROUT were to be acquired by another company, that company would have to cough up $500 million -- or more, since buyouts generally exceed market prices.
You can get a handle on interpreting a company's market cap by comparing it with other firms.
For example, here are some companies' market caps as of one day in April 2004:
|Home Depot||$81 billion|
|Time Warner||$81 billion|
|Walt Disney||$58 billion|
|General Motors||$17 billion|
|Barnes & Noble||$2.5 billion|
Consider eBay. If you've studied it and understand the range and promise of its business, you might compare its current market value to other companies with which you're familiar, particularly those in similar lines of business. At $47 billion, it's being valued at nearly as much as Amazon.com, Starbucks, and General Motors -- combined. Given what you know and what you think, this might (or might not) make perfect sense. The market cap can't tell you all you need to know, but it can give you an initial sense of how a company is being valued right now.
Similarly, consider Amazon.com. Is it worth more than five times the value of Barnes & Noble? (A few years ago, it was priced at more than 10 times that value.) Some investors will think that's outrageous, since Amazon.com doesn't have a long track record of profitability. Others might think it's a fair valuation, given that Amazon.com sells much more than books and doesn't have to support brick-and-mortar stores.
Again, it's very simplistic and superficial to just consider a company's market cap. If this is the only measure you look at when you invest, you're not likely to fare too well. But in proper context and amid many other measures, a company's market cap can offer some useful food for thought.