Capitalization (cap)

The term capitalization is used in different ways depending on whether you are using it as an accounting term, finance term, or corporate term.

The corporate term is perhaps the easiest to understand since capitalization in the corporate world means converting the retained earnings of a firm into capital by issuing new stocks. It is converting profit into capital.

In accounting, capitalization refers to the practice of recording an expense or cost as a fixed asset that depreciates over time. There are many valid reasons for capitalizing an expense though it should be noted that it can also be construed as fraud when done improperly.

Capitalization (cap) is perhaps most frequently used as a finance term but is referred to as market capitalization or market cap. The term market cap refers to the value or size of a company as determined by the market.

The market cap of company is measured by multiplying the number of shares outstanding of a public company by the share price. The market capitalization of a company is very important because it represents the company’s net worth and as thus affects the public opinion regarding the company’s stability and growth.

Companies are divided into categories depending on the size of capitalization. The smallest companies with market capitalizations of less than $50 million fall under the “nano-cap” category. Next fall under Micro-cap, Small-cap, Mid-cap, and Large-cap (ranges from $50 million – $200 billion). The last category is the Mega-cap for those with capitalizations of over $200 billion.

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