When you think of capitalization you may be brought back to your spelling and grammar lessons in grade school. In the finance world, capitalization is an important measure that is integral to helping investors know what a company is valued at and whether or not buying stock in that company would be a good investment.
What is capitalization?
- One way to measure if a company is a good investment by knowing how much a company is valued or priced by the investing public.
- Knowledge of a company’s capitalization provides a short and sweet summary of how the market values the brand or business.
- You can get to the market capitalization by multiplying the number of shares by the current price in the stock market.
Companies like Coca-Cola or Apple cannot be physically weighed the same way you can measure your own body fat by stepping on a scale. But you can know how massive a company is by knowing its capitalization. Capitalization is basically how much the stock market weighs a company’s value. The more Wall Street trusts the company and the higher demand the shares are, the higher the market cap of the company.
For companies to raise the funds they need to improve business operations, grow, and uplevel the quality of employees among other things, they have to issue shares to the public. When a company IPOs, they sell part of the company’s ownership to investors. The proceeds of their sales of stocks are then used as capital to operate their business.
To know how much the market capitalization of a company is, you have to:
- Get the number of issued shares already available to the public. For example, Company ABC has 1,000,000 shares issued.
- Find the price of a single share when the stock market closes. Assuming that the New York Stock Exchange, trades Company ABC, the closing time would be 4 p.m. EST. Let us say that one share of ABC is worth $2.
- Multiply the price by the number of shares issued. Company ABC has 1,000,000 shares, and the current price is at $2, so the market capitalization of Company ABC is at $2,000,000.
See? Getting to the capitalization is very easy to do.
Capital is the oil that fuels businesses
A journey of a thousand miles begins with a single step. Capital provides companies with the ability to make the first step. Before a successful company exists, it was just an idea. Once equity, or funds, were issued, a company then starts its journey towards recording profits and providing services.
The investors and shareholders expect that the capital invested in the company will grow. The public wants to know if their investments are performing well. People buy or sell shares based on their belief that a stock will increase or decrease in value over time. Because of this constant exchange of buyers and sellers, the value of a company changes day by day.
Our lives are made more fruitful and more convenient due to the products and services provided by prominent companies. We have Netflix and Disney giving us convenient access to great shows, and we have Microsoft and Tesla making great strides in technology to make our lives more productive, just to name a few.
For these companies to continue giving us beautiful movies and fantastic products, these companies need to have capital. While knowing how market capitalization can be useful, do remember that other important factors can lead to the price of a share to go up and down. Learn as much as you can before you invest. Like everything in life, it is always best to do your homework!