Stock Market Capitalization
The stock market offers up the best risk versus rewards metrics out of any asset class. Here, Main Street savers may take ownership over the world’s largest and most efficiently managed enterprises. In exchange, corporations are supplied with cash, with which to make capital investments to grow their respective businesses even further. Stock market capitalization is a top-level valuation calculation and measure of investment performance.
Market capitalization is the value that Wall Street implicitly sets upon an entire corporation. To calculate market capitalization, you would multiply the corporation’s current share price times its number of shares outstanding. On April 29, 2022, Apple shares closed out the trading session at $157.65, with 16.4 billion shares of common stock outstanding. Apple is the second largest publicly traded corporation in the world at $2.6 trillion in market capitalization.
Saudi Arabian Oil Company, or Aramco, is now the world’s largest corporation at $8.3 trillion market capitalization, largely on the strength of $100 oil. The GDP of Canada is $1.7 trillion.
Stocks are typically categorized according to small, middle, and large capitalization. Small capitalization stocks range up to roughly $2 billion in value, while large capitalization stocks begin at $10 billion. Big business, household names like Coca Cola, Exxon, McDonalds, and Microsoft are all large capitalization stocks notable for steady growth and dividend payouts. The S&P 500 Index and Dow Jones Industrial Average are market benchmarks – both made up of large capitalization component stocks.
Investors who embrace risk will mine the trading floor for small and mid-cap stocks. Smaller companies will typically prioritize growth and pay little to no dividends. Here, the “next big thing” may be found, while numerous other small issues go bust and fail altogether.
Mergers and Acquisitions
Market capitalization is the baseline price for all buyout offers. Shareholders of the target company will demand a premium price above market capitalization as compensation for the opportunity costs of future growth. In January, Microsoft laid out a $68.7 billion offer on the table for Activision, with the video game stock trading for $65 per share, or $51 billion in market capitalization. Now, months later, the Microsoft offer price is still a significant premium above Activision’s $79 share price. Warren Buffett, for his part, has gobbled up Activision stock in hopes that this Microsoft – Activision buyout will finally close.
This strategy is called merger arbitrage. Onyx Investments used similar techniques to profit further through the Luis Vuitton / Tiffany buyout deal.