Market capitalization
Also written Market capitalisation
The market value of a company: total shares outstanding multiplied by the current market price. It sets index weights and underpins derivatives eligibility and position limits.
In plain language
Market capitalization is what the stock market says a whole company is worth today. The workbook's definition is arithmetic: the market value of a company, calculated by multiplying the total number of shares outstanding by its current market price.
It moves every time the price moves. It is not the book value and not the face value of the shares — it is the price the market is paying, applied to every share in issue.
Its free float variant counts only the shares readily available for trading, leaving out holdings that are not. The workbook notes that a majority of stock indices globally have moved to free float basis over time, including the Indian equity indices Sensex, Nifty and SX40.
How it works
Market capitalization shows up in four places in this paper:
1. Index weights. In a market capitalization weighted index, each stock's weight is its market capitalization divided by the total. The higher a constituent's market capitalization, the higher its weight. Sensex and Nifty were earlier designed on this method and have since moved to free float.
2. Derivatives eligibility of a stock. A stock proposed for stock options and single stock futures must be among the top 500 stocks in terms of average daily market capitalization and average daily traded value in the previous six months, on a rolling basis, alongside the other criteria in section 6.2.
3. Client-level position limits. For stock derivatives, a client's gross open position across all contracts in a security may not exceed the higher of 1% of the free float market capitalization (in terms of number of shares) or 5% of the open interest in all derivative contracts on that stock per exchange.
4. Market-wide position limit. MWPL for a stock is 20% of the number of shares held by non-promoters — which the workbook equates with 20% of the free float in number of shares.
The formula
Market capitalization = Shares outstanding × Current market price
Weight of stock i in the index = Market cap of i ÷ Sum of market caps of all constituents
A worked example
The workbook's definition example. ABC company has 5,00,00,000 shares outstanding at Rs 120:
Market capitalization = 5,00,00,000 × 120 = Rs 6,00,00,00,000 = Rs 600 crore
Weights drift with prices — the workbook's index table (Chapter 2).
| Stock | Old M.Cap (Rs lakh) | Old weight | New M.Cap (Rs lakh) | New weight |
|---|---|---|---|---|
| AZ | 3,000 | 0.16 | 13,000 | 0.31 |
| BY | 3,600 | 0.19 | 5,400 | 0.13 |
| CX | 7,200 | 0.38 | 9,600 | 0.23 |
| DW | 3,000 | 0.16 | 10,500 | 0.25 |
| EU | 2,000 | 0.11 | 4,000 | 0.09 |
| Total | 18,800 | 1.00 | 42,500 | 1.00 |
Nobody rebalanced anything. AZ's price rose from Rs 150 to Rs 650, so its weight nearly doubled on its own — (3,000 ÷ 18,800 = 0.16) to (13,000 ÷ 42,500 = 0.31).
Full versus free float (illustrative numbers). A company has 10 crore shares at Rs 500, and promoters hold 60%.
Market capitalization = 10 crore × 500 = Rs 5,000 crore
Non-promoter (free float) shares = 10 crore × 40% = 4 crore shares
Free float market capitalization = 4 crore × 500 = Rs 2,000 crore
MWPL = 20% × 4 crore shares = 80 lakh shares
Client limit, free float leg = 1% × 4 crore shares = 4 lakh shares
(The client limit is the higher of this and 5% of open interest, which would need the open interest figure.) In a free float index this company carries the weight of Rs 2,000 crore, not Rs 5,000 crore.
Why NISM asks about it
Chapter 2, section 2.3, defines market capitalization with the ABC example and builds the market capitalization weighted and free float indices from it. Chapter 6, section 6.2, uses average daily market capitalization in the stock eligibility criteria, and Chapter 7, section 7.7, uses free float market capitalization and non-promoter shares for position limits. Expect the direct computation, the weight calculation, and the "top 500" and "1% of free float" thresholds.
Common exam traps
- Market capitalization uses the current market price, not face value or book value.
- In a market cap weighted index, weights change as prices change — no rebalancing is involved.
- Free float excludes shares not readily available for trading; the workbook ties MWPL to shares held by non-promoters.
- Stock eligibility uses average daily market capitalization over six months, together with average daily traded value — not market capitalization on a single day.
- The client-level limit is the higher of 1% of free float market cap (in shares) and 5% of open interest — not the lower.
- Sensex, Nifty and SX40 are free float indices now; "earlier designed on market capitalization weighted method" is history.
Where this is taught
- Series VIII · Chapter 2: Understanding Indexintroduced here
- Series V-D · Chapter 14: Understanding Indexintroduced here
Related terms
- Market Wide Position LimitThe ceiling on total open interest in a stock's futures and options across exchanges — 20% of non-promoter shares. Above 95% no fresh positions are allowed until it falls to 80%.
- Position limitsThe maximum open positions the whole market and each trading member or client may hold in interest rate derivatives — set as the higher of a percentage of open interest or a rupee amount, and always specified in lots.
- Base valueThe starting level an index is set to on its base date — often 100 — from which every later index value is expressed as a change, so the percentage move matters more than the number.
- Free floatThe part of a company's shares readily available for trading — broadly, what is not locked up with promoters. Indices, position limits and MWPL are all measured on it.
- IndexA statistical indicator that tracks a portfolio of securities representing a market or part of it, expressed as a change from a base value — so the percentage move matters, not the number itself.
- Value weighted indexAn index weighting each stock by its market capitalisation, or free-float market capitalisation, divided by the total — the most popular method, and the natural basis for index funds and derivatives.
- Free-float market capitalisationAn index-weighting method using only the shares actually available to the public — excluding promoter, government and strategic locked-in holdings — so a stock's index weight tracks its tradeable size.
- Market cap to GDP ratioThe market capitalisation of all listed companies divided by the economy's GDP, times 100 — used to judge whether a whole market is cheap or expensive against its own history or its peers.
- Turnover ratioThe value of shares traded in a market divided by its market capitalisation, a liquidity gauge for the market as a whole, distinct from a mutual fund's Portfolio Turnover Ratio.
- Market capitalisation bandsSEBI's rank-based bands for classifying companies by size — large cap is the 1st to 100th company, mid cap the 101st to 250th, small cap everything from the 251st onward, by full market capitalisation.
- SensexBSE's benchmark index of 30 large companies, the oldest and best-known bellwether of Indian equity markets, based at a value of 100 in 1979.
- Index constructionChoosing an index's constituent stocks and deciding its calculation methodology — a trade-off between diversification and liquidity, with the final inclusion call taken by an Index Committee.