Market Capitalization

Q: What does "market cap" refer to?

— C.R., Mobile, Ala.

A: A company's market capitalization is kind of its price tag — it's the current value placed on the firm by investors in the stock market. Calculating it is simple. Just take the current stock price and multiply it by the number of shares outstanding. (Many online stock quote providers include shares outstanding and often the market cap, too.)

Imagine Dodgeball Supply Co. (ticker: WHAPP). Let's say it has 25 million shares outstanding and trades around $30 per share. Multiply 25 million by $30, and you'll get a market cap of $750 million. That's the current market value of the company. If you wanted to buy the whole company, you'd have to fork over $750 million — or more, as buyouts generally occur above market prices.

Checking out the market cap of a company you're interested in can be enlightening. For example, if you're thinking of investing in Amazon.com, note that its market cap is around $35 billion, more than Nike's value. Compare that with Barnes & Noble and eBay, which sport market caps of roughly $1.4 billion and $32 billion, respectively. Does Amazon's value seem reasonable in comparison? It depends on your assessment of its potential.

Q: What makes a company "large cap" or "small cap"?

— T.C., Salinas, Calif.

A: There's no universal definition, but here's one rough take: If a company's capitalization is $5 billion or higher, call it a large-cap; between $1 billion and $5 billion, a mid-cap; $250 million to $1 billion, a small-cap; and less than $250 million, a micro-cap. Xerox is a largecap, while Office Depot is a mid-cap.

Got a question for the Fool? Send it in — see Write to Us.