Market Capitalization is a term used for referring to the value of the outstanding shares of a company.
Outstanding shares are the common stocks issued, purchased and held by the investors, with company authorization.
Therefore, we can also recognize these shares with the name "issued shares.
" We can as well understand the market capitalization as a product of the stock share value held by the company, and the price of one stock share.
The fiscal markets use this concept to ascertain the company's size, in terms of stock value.
Thus, when we refer to a company as small, medium or large, it is a reference to its business and the market cap, rather than the dollar value of its sales or assets.
Market cap is different from capitalization.
The latter is a term used in the company's balance sheets (or financial statements) for referring to the sum total of shareholder equity and the company's long-term debt.
One should also not mix the changes taking place in market capitalization with the returns earned on investment.
Market capitalization can minimize the total returns to a shareholder, who bought and held the stocks, at a serious rate.
Market cap changes are unsuitable for determining an investor's wealth.
Do you want to know why? Following are some of the reasons behind the same.
• The company's Board of Directors may think about repurchasing the shares, which might in turn reduce their outstanding.
Therefore, the company will not be able to grow its overall net profit with the low stock prices, even if compounded at a good rate.
• The shareholders will receive their capital returns in the form of cash dividends.
This will not be visible in the share price, as the money comes in the hands of its owners, not the company.
• Without considering, companies may even try using their own stocks for acquiring other companies.
Usually, this happens in case the company undervalues, or the target company over-values, resulting in market capitalization.
However, the intrinsic value per share of each stock will not increase in its proportion.
In many cases, the same can even decrease, despite the rise in the enterprise's total market cap.
• The widening of divisions and subsidiaries to the company shareholders will result in the ample amount of additional wealth.
This will never reflect in the original investment's share price or market capitalization.
When a company returns its additional profits to its shareholders via repurchase of its own common stock, the result will be outstanding in the total shares and a high-profit percentage with each of the remaining shares.
In the distant future, despite no increase in the company's overall market capitalization, the results will be astonishing in terms of excess wealth.
This will be the wealth that the owners will receive, who held onto their shares.