Valuation
Market capitalization represents the public consensus on the value of a company's equity. In a public corporation, ownership interest is freely bought and sold through purchases and sales of stock, providing a market mechanism (price discovery), which determines the price of the company's shares. Market capitalization is defined as the share price multiplied by the number of shares in issue, providing a total value for the company's shares outstanding.
Market capitalization is the total dollar market value of all of a company's outstanding shares. Market capitalization is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to sales or total asset figures.
If a company has 35 million shares outstanding, each with a market value of $100, the company's market capitalization is $3.5 billion (35,000,000 × $100 per share).
Many companies have a dominant shareholder, which may be a government entity, a family, or another corporation. Many stock market indices such as the S&P 500, Sensex, FTSE, DAX, Nikkei, Ibovespa, and MSCI adjust for these by calculating on a free float basis, i.e. the market capitalization that they use is the value of the publicly tradable part of the company. Thus, market capitalization is one measure of "float" i.e., share value times an equity aggregate, with free and public being others.
Note that market capitalization is based on a market estimate of a company's value, based on perceived future prospects, economic and monetary conditions. Stock prices can also be moved by speculation about changes in expectations about profits or about mergers and acquisitions.
It is possible for stock markets to get caught up in an economic bubble, like the steep rise in valuation of technology stocks in the late 1990s followed by the dot-com crash in 2000. Hype can affect any asset class, such as gold or real estate. In such events, valuations rise disproportionately to what many people would consider the fundamental value of the assets in question. In the case of stocks, this pushes up market capitalization in what might be called an "artificial" manner. Market capitalization is, therefore, only a rough measure of the true size of a market. However, it does represent the best estimate of all market participants at any point in time—bubbles are easy to spot retrospectively, but if a market participant believes a stock is overvalued, then of course they can profit from this by selling the stock (or shorting it, if they don't hold it).
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