What Is the Market Capitalization Rule?
The market capitalization rule is a rule set by the New York Stock Exchange (NYSE) to determine a minimum market value for a company to continue to be listed on the exchange. The market capitalization rule states that companies must maintain a minimum market cap of $15 million over a consecutive 30-day trading period. The value requirements can change as determined by the NYSE.
Key Takeaways
- The market capitalization rule is a minimum threshold criterion for a company's total market value for it to be listed and remain listed on the New York Stock Exchange (NYSE).
- The market capitalization rule currently stands at $15 million over a consecutive 30-day trading period.
- If the rule is not met, the company may be delisted from the stock exchange, but the rule can be temporarily altered to meet changing market or economic conditions.
Understanding the Market Capitalization Rule
The term market capitalization or market cap refers to the market value of a company’s outstanding shares. This metric is used to measure a company’s size; therefore, a market capitalization rule guarantees that companies must be of a certain size in order to remain listed on the NYSE. The market capitalization rule may also be called the market capitalization test.
Market cap is calculated simply by multiplying a company's outstanding shares by the current market price of one common share.Since a company is represented by X number of shares, multiplying X with the per-share price represents the total dollar value of the company. Outstanding sharesreferto a company's stockcurrently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders
The NYSE will usually look at a company’s total common stock outstanding when applying the market capitalization rule. This can include treasury shares and common stock that could be issued after the conversion of another type of outstanding equity security. The NYSE will consider securities that are, therefore, either publicly-traded or quoted, or those that can be converted into publicly traded or quoted securities (e.g. convertible bonds).
Lowering of the Market Capitalization Rule
Due to the downturn of the global economy in 2008-2009, the NYSE temporarily amended the market capitalization rule in January of 2009. The minimum value was reduced so that companies who are able to maintain a market value of over $15 million (down from $25 million) for 30 trading days in a row would remain listed until April 22, 2009.
This marked the first time that the NYSE suspended its marketing capitalization requirements for its listings. The NYSE’s oversight body chose to lower the market cap requirements after a “significantly higher” than normal number of companies failed to meet the market cap minimum in the wake of the 2008 financial crisis.
In lowering the limit, the NYSE acknowledged that the “unusual market conditions” of the time were to blame for the sharp fall in many companies’ stock prices, rather than problems with the companies themselves.
The exchange also adjusted the market cap rule in March 2020 during the 2020 crisis, which resulted in a severe economic decline due to lockdown measures to prevent the spread of the virus. Many companies were in danger of being delisted at current levels and so the NYSE decided to suspend the market cap rule for companies in danger of being delisted, specifically the 30-day requirement, until June 30, 2020.
Delisting Procedure
If the NYSE decides to delist a company due to its failure of the market cap test, it will notify that company in writing. The notification will describe the NYSE’s basis for delisting and the criterion or policy under which the delisting action is being taken. The notice will also include information about the company’s rights to request a review of this decision by the Committee of the Board of Directors of the Exchange.
To avoid being delisted, some companies will undergo areverse splitof their shares. This has the effect of combining several shares into one and multiplying the share price. For example, if a company executes a 1 for 10 reverse split, it could raise their share price from 50 cents per share to five dollars per share, in which case it would no longer be at risk of delisting. This tactic, however, would not prevent a stock from being delisted due to the market capitalization rule since the reverse split would not change the total value of the firm but rather the share price of the firm.
FAQs
The market capitalization rule is a rule set by the New York Stock Exchange (NYSE) to determine a minimum market value for a company to continue to be listed on the exchange. The market capitalization rule states that companies must maintain a minimum market cap of $15 million over a consecutive 30-day trading period.
How does market capitalization work? ›
Market capitalization shows how much a company is worth as determined by the total market value of all outstanding shares. To calculate a company's market cap, multiply the number of outstanding shares by the current market value of one share.
What does market capitalization rate tell you? ›
Market cap, or market capitalization, is one way of measuring a company's total value, based on outstanding shares of stock. A company's market cap will fluctuate with its share price. Investors can use market cap to gauge public interest and company strength.
What is the formula for calculating market cap? ›
Market cap is calculated by multiplying a company's outstanding shares by the current market price of one share. Since a company has a given number of outstanding shares, multiplying X with the per-share price represents the total dollar value of the company.
What is a good market cap for a stock? ›
Sizing up stocks
Large-cap: Market value of $10 billion or more; generally mature, well-known companies within established industries. Midcap: Market value between $3 billion and $10 billion; typically established companies within industries experiencing or expected to experience rapid growth.
How to use market cap to predict price? ›
Market cap does not influence share prices. It works the other way around. Market cap is arrived at by multiplying the share price by the number of shares outstanding.
What is an example of a market capitalization? ›
To calculate market cap, you take the total number of a company's shares outstanding and multiply that figure by the company's current stock price. For example, if a company has 5 million shares outstanding and its current stock price is $20, it has a market capitalization of $100 million.
What does 7.5% cap rate mean? ›
A 7.5% cap rate means the investment property will generate a net operating income which equates to 7.5% of the property's value. For example: A $300,000 property with a 7.5% cap rate would generate a net operating income of $22,500.
What is a cap rate for dummies? ›
Cap Rate Meaning
It's used to identify the return an investor can expect to receive from an investment property. So, as a quick example, if a property were listed at $500,000.00 with an NOI of $75,000.00, the cap rate would be 15% (75,000.00/500,000.00 = .
What's a good cap rate? ›
Investors hoping for deals with a lower purchase price may, therefore, want a high cap rate. Following this logic, a cap rate between four and ten percent may be considered a “good” investment. According to Rasti Nikolic, a financial consultant at Loan Advisor, “in general though, 5% to 10% rate is considered good.
Market cap estimates the value of a public company by multiplying its current share price by the total number of outstanding shares. The term “valuation” refers to any attempt to estimate the value of a company, which includes the market cap and other methods.
What is the difference between net worth and market cap? ›
Net worth is the book value (Assets - Liabilities). The market cap of a company is the value of all the company shares trading in the stock market. The market cap could be higher or lower than the book value. In most cases it is higher.
Are equity value and market cap the same? ›
The Market Cap—or “Market Capitalization”—is the total value of a company's equity from the perspective of its common shareholders. Often used interchangeably with the term “equity value,” a company's market capitalization measures the value of its common equity as of the latest market close.
What is market cap in simple terms? ›
Market cap is the total value of a company's stock, found by multiplying the stock price by the number of outstanding shares. Market cap helps investors assess a company's size, growth potential, and risk level, and it's widely used in financial analysis and investment strategies.
What company has the largest market cap? ›
Top 25 Companies by Market Cap
- Apple (AAPL) Market Cap: $3.46 Trillion. ...
- NVIDIA (NVDA) Market Cap: $3.16 Trillion. ...
- Microsoft (MSFT) Market Cap: $3.10 Trillion. ...
- Alphabet (GOOG) Market Cap: $2.05 Trillion. ...
- Meta (META) Market Cap: $1.35 Trillion. ...
- Berkshire Hathaway (BRK-B) Market Cap: $963 Billion. ...
- Eli Lilly (LLY) ...
- Broadcom (AVGO)
Market capitalization, or market cap, is the total value of a company's shares of stock. If a company has issued 10 million shares, and its share price is $100, its market cap is $1 billion. Market cap is calculated by multiplying the number of stock shares outstanding by the current share price.
How to know if a stock is large cap? ›
The first 100 companies ranked according to their market capitalization by the stock exchanges are known as large cap companies. These stocks have a market cap of more than Rs. 20,000. The companies with rankings from 101 to 250 are known as mid cap companies.
Is market cap based on revenue or profit? ›
Key Takeaways:
Market capitalization and revenue are two metrics used for value estimation. Market capitalization reflects the total value of a company based on its stock price. Revenue is the amount of money a company earns as a result of sales. It is possible for a company to have a large market cap but low revenues.
What is considered a large cap? ›
Large cap refers to a company with a market capitalization value of more than $10 billion. Also referred to as “big cap,” large cap describes a class of popular stocks preferred by investors for their stability.
What is considered a small-cap? ›
Small-cap stocks are shares of companies with total market capitalization in the range of about $300 million to $2 billion. Small-cap companies have the potential for high rates of growth, making them appealing investments, though their stocks may experience more volatility and pose higher risks to investors.
