One of the common terms in stock trading is the market capitalization or the “market cap”. The market capitalization of a company is, in short, the company’s value as determined by the market.

For example, at this moment, the market capitalization of Apple is $331.39 billion, that of Bank of America is $108.42 billion, that of Citigroup is $122.75 billion, and that of Google is $171.43 billion. Here is a list of the top 100 companies with the highest market capitalization.

The higher the market cap of a company, the more important the company is. However, it is worthy to note that a high market capitalization does not imply a healthy status of the company. Some companies (especially banks) have very high market caps yet they are plagued with different issues that will may haunt them for years to come.

The market capitalization calculation is a very straightforward process, you just multiply the number of shares by the current price of the stock. So the formula would be:

MarketCap = NumShares x StockPrice (where MarketCap is the market capitalization of the company, NumShares is the number of common shares issued by that company, and StockPrice is the price of the stock).

Example on how to calculate the market cap

Let’s look, for example, at Apple’s stock parameters (courtesy of Google finance, as of July 10th, 2011):

You can see from the above that AAPL’s price is $359.71, number of shares is 921.28 million. Let’s apply the above formula:

MarketCap = 921,280,000 x $359.71 = $331,393,628,800. In other words, Apple’s market capitalization is billion $331.39, which matches the number in the image above. Note that Apple is the second listed company by market cap.

By looking at the above formula, we can also know the number of shares if we know the market cap and the stock price of a company (which is helpful if the company wants to do a split or reverse split, and wants to set the price of a stock to a specific number), or the stock price if we know the market cap and the number of shares.