Finance

Market capitalization: definition, calculation and examples

In order to compare companies with one another, one should also look at what is known as market capitalization. What sounds complicated just means: How valuable is a company? How to calculate this metric.

If you are interested in buying stocks, sooner or later you will also learn the terms of the Market capitalization, Market value or Market Cap bump.

First of all: These terms all mean the same thing, namely how valuable a company is whose shares can be bought on the stock exchange.

How can I calculate the market capitalization? And what are the most valuable companies in the world – and in Germany?

Market capitalization: what is it exactly?

The Market capitalization (also called market cap) indicates how valuable a listed company, i.e. a stock corporation, is currently. That is why the market capitalization is also called the market value.

In other words, the market capitalization means the current market value. That’s the amount someone would have to pay now to take over the entire company.

Why do I need market capitalization?

Market capitalization becomes important when you want to invest in a company’s stocks. Because market capitalization can show how crisis-proof a company is.

A higher market capitalization is usually better here because it shows that the company is popular with investors. If the demand for the share rises, the share price rises and then the market value rises too.

Good to know: Companies with a market value of up to 500 million euros are usually among the so-called Small caps. Public companies with a market value between EUR 500 million and EUR 2 billion are considered to be Middle caps. And companies with a market value of more than two billion euros are classified as Large caps designated.

But Attention: You should never rely on market capitalization as the only metric. Because it can be that a company is grossly overvalued – and it’s actually not worth as much as its market capitalization suggests.

Another important metric when valuing a stock is the price-earnings ratio (P / E): It shows how high or low the market values ​​a company’s stock compared to the company’s annual profit. If the P / E ratio is relatively high, this can indicate that the price of the share is (too) high. Basically, it’s better for a stock to have a low P / E ratio.

Here, too, caution applies: companies can use tricks here. So you should make sure that taxes and interest have already been deducted from the profit with the P / E ratio.

Market value decides on inclusion in the Dax

Market capitalization is also important when it comes to the inclusion of a company in the German stock index, in short Dax, goes. From 2021, the stock market value will be the only criterion for inclusion in the leading index. So far he was still playing Stock exchange turnover a role, i.e. how many shares of the company were traded in a certain period of time.

Only the companies with the highest market values ​​should be included in the Dax, that is, vice versa: If the share of a group crashes, the company may have to leave the Dax.

How can I calculate the market capitalization?

The calculation is very simple. To do this, you simply have to multiply the number of shares that can be traded on the stock exchange by the current share price.

The freely tradable shares (“free float”) are called free float. The shares that the listed company itself holds are not included in the calculation. One also speaks of a “free float” market capitalization.

  • Calculation: Number of freely tradable shares x current share price = market value

example: There are 15 million tradable shares in a company. A share currently costs 18 euros. The company’s market capitalization is currently 270 million euros. However, as soon as the stock rises or falls, the market capitalization changes.

Which companies have the highest market capitalization?

The five companies with the highest market value in the world, i.e. the most valuable companies, are Apple, Saudi Aramco, Amazon, Microsoft and Alphabet. Every corporation has a market capitalization of more than one trillion US dollars:

The German stock exchange groups, on the other hand, are lightweights when you consider their market capitalization. The most valuable group in Germany is the software company SAP – with a market value of around 160 billion euros.

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