Define market capitalization.

• A. It's calculated by subtracting liabilities from assets.
• B. It's the total dollar market value of all of a company's outstanding shares and is calculated by multiplying a company's shares outstanding by the current market price of one share.
• C. It's the company's annual net income.
• D. It's the maximum price at which the company can issue new shares.

Answer: (B)

Market capitalization is the total dollar value of a company’s outstanding shares. It’s calculated by multiplying the number of shares outstanding by the current price per share. For example, if there are 50 million shares outstanding and the stock trades at $40, the market cap is $2 billion. This measure gives a quick sense of a company’s size and is used to compare firms and classify them as small-, mid-, or large-cap. It reflects the market’s valuation of the equity portion, not the company’s debt or cash, so it isn’t the same as enterprise value or intrinsic worth. Prices move and shares outstanding can change through buybacks or new issue, so market cap fluctuates accordingly; fully diluted market cap accounts for all potential shares from options and convertible securities.