Market capitalisation is effectively the value of the business. It certainly is one of the many ways that can be used in order to value a business. Alternative business valuation tools include the dividend growth model, the earnings per share valuation and there are many others. Market capitalisation for lowly valued companies especially those companies listed on stock markets will have low price earnings ratio as the share price is low compared to its earnings per share valuation.
To define market capitalisation it takes the number of shares in issue and this is multiplied by the share price quoted on stock market listings. The number of shares figure is taken from the balance sheet figure as stated in the financial accounts of a business. People can then multiply the stated figure by the current share price to give a more accurate figure of the market capitalisation.
Market capitalisation may illustrate to stock holders that a company has a good valuation structure and investors can select stocks to buy according to their own judgment and decision making to assess if it is worth investing in lowly capitalised companies or higher and larger companies. Market capitalisation is an important way of determining companies valuations as the top 100 companies trading on the FTSE 100 are those companies that are listed on the stock exchanges with the highest market capitalisations. These stocks tend to appear in newspapers and get mentioned in financial magazines and journals.
The same thing happens around the world including the Dow Jones top 30 shares and top 100 indices, in France there is the Cac40 and Germany has a stock market index called Xtradax which has their own leading shares by market capitalisation. The higher the share price goes the higher the market capitalization moves accordingly, though when investors start selling their shares the market capitalisation also falls according to how much the share price has fallen.
For leading companies, the management team must produce good results in terms of financial accounts as well as investor presentations to ensure that the news flow for investors is good enough to satisfy investor confidence. Good news will drive the market capitalisation and the share price upwards, whereas poor trading results will lower the share price. Speculation can also drive the market in different directions which also can affect the share price. Times of bullish investor sentiment towards certain types of stocks will drive the share price and market capitalisation higher.
By category and size of a company based on market capitalization the level of funds invested will vary depending on the size of the capitalization. Nano capitalized corporations are valued at below $50 million, micro capitalized companies are valued at between $50 and 300 million dollars. Snall cap firms are valued on an aggregate basis are classified to be worth between $300 million to $2 billion dollars, mid capitalized corporations are worth between $2 billion to $10 billion.