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Market Cap, Liquidity and Float Data in Trading: The Ultimate Guide

MARKET CEILING

Market capitalization,
or simply market capitalization, refers to the total market value of a publicly traded company. It is calculated by multiplying the total number of shares outstanding by their current market price.

For example, if a company has 1 million shares outstanding and the market price of its shares is $20, the market capitalization would be $20 million.

Market capitalization is used to compare the relative sizes of different companies.

Companies with a market cap of $10 billion or more are called large-cap companies. Midcap companies have a market capitalization of between $2 billion and $10 billion. Companies with a market capitalization of less than $300 million are classified as small-cap companies. 

LIQUIDITY

The liquidity of an asset or security refers to the speed and ease with which it could be sold and converted into cash in the market without affecting its price.

For example, most stocks are highly liquid as they could be sold in seconds on the stock exchange without affecting their prices. Real estate, on the other hand, is considered an illiquid asset as it could not be sold as quickly as financial securities such as stocks. You may not find a buyer for your real estate, and even if you find a potential buyer, you may not settle for the price.

Liquidity could also refer to a company’s ability to use its short-term or liquid assets such as cash to meet its short-term liabilities. A common measure of a company’s liquidity is the current ratio, which is calculated by dividing its total current assets by its total current liabilities.

A ratio of 1 is considered a healthy number, but the number is not absolute and you might gain more insights if you compare it to that of other companies.

FLOAT DATA

Float refers to the total number of outstanding shares of a company minus shares that are subject to some form of trading restriction. For example, if a company has 1 million shares outstanding with 0.1 million shares subject to sales restrictions, the company’s free float would be 0.9 million shares.

The free float determines the total number of shares available for trading. Limited shares are mostly held by corporate insiders who are prohibited from selling them on the stock exchange. Trading of shares in a free float takes place in an exchange without any liability on the part of the company.

Float differs from authorized shares, which refer to the total number of shares that a company is legally allowed to issue. Outstanding shares consist of all shares of a company available for trading to the public, including restricted shares, on the secondary market.

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