Market Capitalization: Definition and Calculation

Business Development Bank of Canada (BDC) has outlined the definition and calculation of market capitalization, a key metric for publicly traded companies. Market capitalization refers to the total value of a company's issued common and preferred shares on the open market.

The calculation is performed by multiplying the number of outstanding common shares by their current market price and adding that to the product of the number of outstanding preferred shares multiplied by their current market price. Only authorized and issued shares are included in this calculation.

This market value typically differs significantly from the "book value" found on a company's balance sheet, which reflects the value at the time the shares were initially issued. Market capitalization provides an indication of a company's overall valuation in the stock market.

For instance, a company with 1,000,000 common shares trading at $1.70 each and 500,000 preferred shares trading at $1.00 each would have a market capitalization of $2,200,000 (($1.70 * 1,000,000) + ($1.00 * 500,000)).

BDC offers various resources for entrepreneurs, including a glossary of financial terms to aid understanding of business concepts.