What you should know about market capitalisation
So, what is capitalization? There is a generally accepted definition. Capitalization is the market cost of a company, the stock of which is traded on the stock exchange.
However, you can find other definitions of capitalization. For example:
- money capitalization takes place only when it starts to increase its cost;
- bank deposit capitalization takes place when the interest is accrued.
There are other types of capitalization:
- real capitalization emerges in the result of increase of the own capital or property of a firm;
- market capitalization is built in the result of buys and sells on the exchange. These could be speculative operations. It is difficult to find information about capitalization of minor companies the stock of which is not quoted on the exchange. That is why some sources recommend to assess the total amount of all securities (exchange bills, bonds and other), converted into the capital, as the market capitalization. It is also called fictitious capitalization;
- marketing or subjective capitalization takes place by means of increase of the cost of intangible assets, for example, reputation;
cryptocurrency market capitalization is a term, which became popular on the wave of advancement of cryptocurrencies (how to make money on cryptocurrencies). Bitcoin has the biggest capitalization out of all cryptocurrencies:
Company stock capitalization
Market capitalization or stock capitalization is the product of a number of company shares and their market cost. For example, capitalization of Amazon as of September 19, 2019, was USD 904.14 billion.
Since the stock price changes every day, the market capitalization also changes. That is why we can read in the news that “Jeff Bezos, the founder of Amazon, lost nearly USD 20 billion in 2 days”.
30 Oct 2018
The richest man in the world lost USD 19.2 billion in 2 days
The richest man in the world Jeff Bezos lost USD 19.2 billion. This is the biggest loss in the history of mankind. The billionaire’s wealth decreased after the fall of the Amazon stock on the American exchange
By the way, let’s check what we see in the ATAS trading platform during this period. Here is an hour chart of Amazon (AMZN) with the Volume and Stacked Imbalances indicators with the following settings: 300%, 3 levels of imbalance in a row and the volume of more than 400 items.
Investors, most probably, registered their profit in point 1 on Thursday October 25 on the eve of a huge gap-down. We think that it was profit registration by long positions and not short sells, since things were coming to a week-end and the price didn’t close the previous gap completely in point 2.
The price was opened on October 26 with a huge gap-down but grew for a certain period on high volumes. A new decrease started in point 2 at the level of closing a candle of October 26. Aggressive traders could have opened short positions there, since the Stacked Imbalances had already sent a signal.
Traders, who wanted to get additional confirmation, could have opened short positions in point 4 after the price went below the low of October 26 and Stacked Imbalances showed the sellers aggression three times. Investors, who wanted to buy Amazon stock cheaper, could have entered in point 5 when the price consolidated above the low of October 29.
This trading situation is profitable both for those who want to make a speculative profit and for those who want to buy the stock cheaper.
We considered trading through the example of the volume analysis. The term capitalization is, practically, not used in this type of analysis. Fundamental analysis is a different story.
Capitalization and fundamental analysis of a company
Investors assess attractiveness of a company with the help of market capitalization. In the event it is a major company, its capitalization could be used for assessment of the economic potential of the market industry or even of the whole country.
The concept of market capitalization is closely connected with:
- production capitalization, which is the cost of all assets of the enterprise, which participate in the economic activity and increase the capital;
- taxable capitalization, which is the cost of property, for which the enterprise pays taxes;
- social capitalization, which is the cost of expenditures for charity and acquisition of socially significant facilities.
The scheme of interrelations of these concepts may look as follows.
Let’s consider the factors which influence market capitalization of a company:
- financial state – profitability, liquidity and financial stability;
- quality of business processes – availability of a marketing plan and strategy. The cost of production could be decreased by means of business processes thereby increasing the market capitalization;
- intangible assets – a brand name, developments, market share, etc. The degree of influence of intangible assets is constantly growing;
- tangible assets – buildings, machinery, land, etc.
It is important to remember that the market capitalization doesn’t take into account the company debts, that is why it doesn’t reflect the real value of an enterprise.
Capitalization is a term, which is widely used in the fundamental analysis. If you believe that your way is the technical analysis or more progressive cluster analysis, download the test version of the ATAS platform free of charge. Our video blog on YouTube has many videos on how to use ATAS for the market analysis and intraday trading.