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What Is Market Capitalization?

Market capitalization is a measure of a company’s size, in terms of the value of its total outstanding shares. Most readers have probably heard of large-cap, mid-cap, and small-cap stocks.

These classifications are based on the market capitalization of a company, which is defined as the number of a company's outstanding shares multiplied by the price of one share.

For example, if company ABC issued 1,000 shares and it is trading at $10/share, then the market capitalization of company ABC is 1,000 x 10 = $10,000. The largest company by market capitalization as of the time of this writing is Apple Inc. Its market capitalization exceeds $750 billion.

Very often, people confuse the market capitalization of a company with the price of one share of the company. For example, if company ABC issues 10 shares at $100/share (with a market cap of 10 x $100 = $1,000), but another company DEF issued 5,000 shares at $1/share, its market cap is 5,000 x $1 = $5,000, and it is five time bigger than the first company, even though its stock is trading at a dollar.

This can come into play when weighting indexes. Some give weights based on price (Dow Jones Industrial Average), some on market cap (S&P 500), and some use other criteria. As you can see from the above example, choosing one of these weighting methods over the other can create completely different results.

What is Weighted Average Market Capitalization?
What is a Price-Weighted Index?

Keywords: stocks, S&P 500, market cap, price-weighted index, cap-weighted index, outstanding shares,