Market capitalization refers to the total value of a publicly traded company’s outstanding common and preferred shares in the open market. Publicly traded companies are listed on a public stock exchange.
The formula for calculating market capitalization is as follows:
(Number of common shares x market price) + (number of preferred shares x market price)
Only shares that have been authorized and issued are included in the calculation.
The market value of a company’s shares is often much higher than the “book value” indicated on the company’s balance sheet, which states the value when the shares were issued.
More about market capitalization
Let’s say that ABC Co. has issued 1,000,000 common shares and 500,000 preferred shares. If the market value of each class of share is $1.70 and $1, respectively, then its market capitalization is $2,200,000.
(1,000,000 x $1.70) + (500,000 x $1) = $1,700,000 + $500,000 = $2,200,000