Capitalization

Financial Dictionary -> Investing -> Capitalization

As a financial term Capitalization falls under several categories, but broadly refers to the use of money within a business or company. One use of the term capitalization is to simply refer to the funding of a new business. The method of supplying a new company with Capital or investment funds is therefore capitalization. Capital means money, so capitalization is getting money in to a business.

The next common form of capitalization occurs in accounting when the cost to acquire an asset is written to be included in the price of the asset. For example shipping costs, fees, travel costs, time costs etc. This takes in to account all the capital that is used in the process of obtaining the new asset.

Invested capital is also commonly referred to as capitalization. This is when a corporation's stock, their owed long term outstanding debt and retained profit are all added together. This gets the invested capital amount or the capitalization amount. E.g. All the capital being used.

Market capitalization is when a company's outstanding shares are multiplied by its share price. This gives an indication of the company's net worth and is one of the factors that go in to valuing its stock. This shows its overall 'capitalization' in the market place. Depending on this, companies are referred to as small cap, mid cap, large cap or even mega cap ($200 billion or greater). Against popular belief, just because a company has a large stock price doesn't mean the company itself is large.

The ranking of companies in to different market caps allows potential investors to calculate the growth against risk potential, which usually sees large cap companies experience slower growth with lower risk, whereas companies that are classified as small cap generally have higher growth potential, but with a higher risk.