118. What do you know about market capitalization?

119. Market capitalization: definition.

120. Market capitalization: how to measure

Definition: Market capitalization is the aggregate valuation of the company based on its current share price and the total number of outstanding stocks. It is calculated by multiplying the current market price of the company's share with the total outstanding shares of the company.

Description: Market capitalization is one of the most important characteristics that helps the investor determine the returns and the risk in the share. It also helps the investors choose the stock that can meet their risk and diversification criterion.

How to measure: For example, if XYZ company has 15,000,000 shares outstanding and a share price of $20 per share then the market capitalization is 15,000,000 x $20 = $300,000,000. Generally, the U.S. market recognizes three market cap divisions: large cap (usually $5 billion and above), mid cap (usually $1 billion to $5 billion), and small cap (usually less than $1 billion), although the cutoffs between the categories are not precise or fixed. In our example above, XYZ would be considered a small cap company

Market cap is a relatively good way to quickly value a company. That's because stock prices are generally based on investors' expectations of a company's earnings. As earnings rise, stock traders will bid more for the stock price. Including the number of shares in the calculation offsets the impact of stock splits.

Market cap would be a great way to value companies if they all had the same price to earnings ratio. However, some industries are seen as slow growing or stodgy. Their stock prices are undervalued, and so are the market caps of companies in that industry.

There are several other ways to determine the value of a company. One good way is to determine the net present value of its future cash flow, or income. This gives the buyer an idea of what the return on investment will be. If a company's market cap is lower than the net present value of its cash flow, then it is undervalue, and a candidate for takeover.

Another more conservative approach is to determine the total resale price of all a company's assets. The drawback is that some assets would be difficult to value. Others may be worth more than their resale value. However, this is a good approach for a company that just wants to buy the company and sell off the assets for quick cash. A company whose market cap was much lower than its resale value would be a target for this kind of takeover.

121. Financial assets: sense/meaning and types.

A financial asset is an intangible asset that derives value because of a contractual claim. Examples include bank deposits, bonds, and stocks. Financial assets are usually more liquid than tangible assets, such as land or real estate, and are traded on financial markets.

A debt instrument is a contractual claim, paying fixed dollar amounts.

An equity instrument (or residual claim) obligates the issuer to pay the holder an amount based on earnings after holders of debt instruments are paid.

Some securities combine both debt and equity features, such as preferred stock or convertible debt.

The principal economic functions of financial assets are: (1) to transfer funds from persons who have surplus funds to those who need funds to invest in tangible assets (e.g. mortgage funds lending to homebuyers); (2) transfer funds in such a way as to redistribute the unavoidable risk associated with the cash flow generated by tangible assets among those seeking and those providing the funds (seekers of funds ask others to share the risks in their undertakings).

According to the International Financial Reporting Standards (IFRS), a financial asset is defined as one of the following:

-Cash or cash equivalent;

-Equity instruments of another entity;

-Contractual right to receive cash or another financial asset from another entity or to exchange financial assets or financial liabilities with another entity under conditions that are potentially favourable to the entity;

-Contract that will or may be settled in the entity's own equity instruments and is either a non-derivative for which the entity is or may be obliged to receive a variable number of the entity's own equity instruments, or a derivative that will or may be settled other than by exchange of a fixed amount of cash or another financial asset for a fixed number of the entity's own equity instruments