Market Cap, Explained

Q

What does “market cap” mean? — R.C., Lafayette, Colorado

A

It’s short for “market capitalization”; think of it as a company’s price tag in the stock market. You get it by multiplying the current stock price by the number of shares outstanding. (Many online stock-quote providers list shares outstanding, and they generally do the math for you and provide the market cap, too.)

Imagine that the Acme Explosives Co. (ticker: KBOOM) has 300 million shares outstanding and a stock price near $20 per share. Multiply 300 million by $20, and you’ll get a market cap of $6 billion. That’s the current market value of Acme Explosives. If you wanted to buy the whole company, you’d probably have to pay around $6 billion — or even more. Acquisitions often happen above market prices — sometimes due to a company’s debt obligations, or in order to avoid a bidding war.

It’s worth reviewing the market cap of any company you’re interested in. For example, if you’re thinking of investing in ride-sharing specialist Uber, note that its market cap was recently near $55 billion; that’s more than the recent market caps of Southwest Airlines, United Airlines, JetBlue Airways and Alaska Air — combined. Does Uber’s value seem reasonable in comparison? It all depends on your estimates of its long-term profit-generating potential.

*** What’s “shrinkage”? —

Q

T.S., Charleston, West Virginia

A

It’s a term generally used in the retail industry to refer to the loss of inventory. Some level of shrinkage is routine and expected — such as that due to accidental breakage, administrative errors, fraud (by suppliers or customers making returns) or theft (by customers and employees).

The national average shrinkage rate was recently about 1.4% of sales, per the National Retail Federation.

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