Financial Markets Book Financial Markets For The Rest Of Us
An Easy Guide To Money, Bonds, Futures, Stocks, Options, And Mutual Funds
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by Robert Hashemian

Page 220

But with public companies the job is much easier and a lot more accurate. Their numbers are out for anyone who wishes to inspect them. And one of the most popular yardsticks used by the market to determine the size of a company is its market capitalization, or as it is sometimes referred to, market value, market cap, or valuation. A company's market cap is simply arrived at by multiplying the numbers of its common shares by its share price. For example, if Ford has 1.2 billion shares and a stock price of $50 per share, it would have a market cap of

1.2 billion x $50 = $60 billion.

As you can see, a company's market cap is affected by the number of its shares and its share price. There is seldom a change in a number of shares, although companies sometimes do issue new shares for various reasons. So the market cap of a company depends mostly on its stock price, and it changes as its stock price moves up and down.

Now I am sure you are asking, what about stock splits or reverse splits? Remember that a stock split by itself has no effect on the overall market value of a company, as the company's stock price is adjusted accordingly. For example, if Ford's stock were to split 2 for 1, there would be 2.4 billion shares of it, but each share would be worth $25 immediately following the split. The market cap would remain at $60 billion. Of course if its stock price moves up as a result of the split (as more investors buy the stock), the market cap would also increase, but the stock split itself would not have the slightest effect on its market cap. The market cap is the most popular measure used to gauge a company's size. The larger the market cap, the bigger the company. There are several categories that are used to classify a company. There is no concrete rule on what these numbers should be, but the following list is a good general reference used by many analysts and investors:


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