Can you explain the concept of market capitalization and how it can be useful for understanding companies?

Market cap or market capitalization or market value is a common method of comparing companies across the world in dollar terms. For example, large companies like Amazon, Apple and Microsoft have market capitalization values of close to $1 trillion. Check this table of largest company market cap list to understand and we have looked at a global level.

Market cap—or market capitalization—refers to the total value of all a company's shares of stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares. For example, a company with 20 million shares selling at $50 a share would have a market cap of $1 billion.

Why is market capitalization such an important concept? It allows investors to understand the relative size of one company versus another. Market cap measures what a company is worth on the open market, as well as the market's perception of its future prospects, because it reflects what investors are willing to pay for its stock.

Let us understand market cap versus free-float market cap

Market cap is based on the total value of all a company's shares of stock. Float is the number of outstanding shares for trading by the general public. The free-float method of calculating market cap excludes locked-in shares, such as those held by company executives and governments. Free-float methodology has been adopted by most of the world’s major indexes, including the Dow Jones Industrial Average and the S&P 500.

What are the factors that impact market capitalization of a company

There are several factors that could impact a company's market cap. Significant changes in the value of the shares—either up or down—could impact it, as could changes in the number of shares issued. Any exercise of warrants on a company's stock will increase the number of outstanding shares, thereby diluting its existing value. As the exercise of the warrants is typically done below the market price of the shares, it could potentially impact the company's market cap.

But market cap typically is not altered as the result of a stock split or a dividend. After a split, the stock price will be reduced since the number of shares outstanding has increased. For example, in a 2-for-1 split, the share price will be halved. Although the number of outstanding shares and the stock price change, a company's market cap remains constant. The same applies for a dividend. If a company issues a dividend—thus increasing the number of shares held—its price usually drops.