Financial Hype

"Market Capitalization" is a bad term. It is used to mean the value of a company according to its' current stock price. Capital is a quantity of money gathered together for specific purpose, like making the purchases necessary to start a company. A company may sell stock to raise capital for new projects, or to retire debt.

Once the company sells stock, it no longer derives any benefit from any increase in that stock's value. People who buy and sell stock may derive some gain from its' sale, but the company that originally issued it does not, except perhaps some enhancement to its' reputation.

"Market Valuation" would be a better term, as it reflects how much the company is worth on the open market. However, even this can be misleading: without some research it is hard to tell how much of the stock is actually being sold. If 90% of the stock is held by one person with no intention of selling, then the value of the 10% that is on the market does not have much relation to the value of the company.

Bill Gates and Microsoft are a bad example of this. Bill owns most of the stock. The stock that is owned by other people goes up and down, and a lot of people have made a lot of money off of it. But what would happen if Bill decided to cash in a chunk of his stock? I suspect the price would plummet. So although he is rich, it is mostly just on paper. Take away his Microsoft holdings and he is just another billionaire.

Update December 2016 replaced missing picture.