The market capitalisation of a company is the product of its current market price multiplied by its number of outstanding shares.
The outstanding shares are those issued and fully paid up out of the company’s total authorised shares while the current market price is the price at which a unit of the company is sold on an exchange today.
In Nigeria, companies have to register the number of authorised shares with the Corporate Affairs Commission while the outstanding shares are those that have been issued to the public for subscription either by way of rights, subscription or private placement. Companies can seek approval to convert debts, upon maturity, to ordinary shares (in the case where a convertible bond is issued). When done, this forms part of the outstanding shares.
The market capitalisation of companies on an exchange is the product of all companies listed on the exchange multiplied by their respective current market prices. Increase in market capitalisation (is also called market value) indicates that either new shares have been added and/or prices of companies are on the increase or that there has been a debt conversion to equity and/or the prices of companies have increased. Increase in market capitalisation is a good sign for the capital market.
Factors that can cause an increase in market capitalisation:
- Additional offer of shares in the primary market
- Increase in the value of the company’s market price
- Conversion of debt (corporate bonds) to equities
- New listing of companies on the exchange (in the case of total market value on the exchange)
Factors that can cause a drop in the market capitalisation:
- Decline in the value of a company’s market price
- Delisting of companies (in the case of total market value on the exchange)
Example:
If a company has 1,000,000 ordinary shares, as its number of outstanding shares and a market price of N20.00K today, the market capitalisation of the company will be:
1,000,000 ordinary shares x N20.00K = N20,000,000.00
If the price falls to N15.00 tomorrow, the market capitalisation will be:
1,000,000 ordinary shares x N15.00K = N15,000,000.00
The market capitalisation would have lost N5,000,000.00 or 25%.