WEBVTT - What is market capitalization?

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<v Speaker 1>Welcome to brain Stuff from how Stuff Works dot com

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<v Speaker 1>where smart Happens. I am Marshall Brain with today's question.

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<v Speaker 1>If all the money in the United States only totals

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<v Speaker 1>eight trillion dollars, how can the New York Stock Exchange

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<v Speaker 1>have stocks valued at twenty six trillion dollars. Let's start

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<v Speaker 1>by understanding what global market capitalization means. On the New

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<v Speaker 1>York Stock Exchange, thousands of companies are listed. A company

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<v Speaker 1>has a total number of outstanding shares. Let's say a

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<v Speaker 1>large company has two billion outstanding shares and the stock

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<v Speaker 1>prices ten dollars. That means the total capitalization is twenty

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<v Speaker 1>billion dollars for that company. In other words, if all

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<v Speaker 1>the shares were bought by someone for ten dollars to share,

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<v Speaker 1>the person would have to pay twenty billion dollars to

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<v Speaker 1>buy up the company. If you perform that calculation of

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<v Speaker 1>us all the thousands of companies on the New York

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<v Speaker 1>Stock Exchange and add them all up, you get a

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<v Speaker 1>total capitalization of twenty trillion dollars. The difference between the

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<v Speaker 1>eight trillion dollars in the money supply and the twenty

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<v Speaker 1>six trillion dollars on the New York stock exchange is

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<v Speaker 1>that the eight trillion dollars are actual dollars, while the

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<v Speaker 1>twenty six trillion dollars are all on paper. Stock prices

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<v Speaker 1>fluctuate every day, sometimes by a wide margin. A stocks

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<v Speaker 1>price can fall ten percent in one day. On paper

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<v Speaker 1>billions can evaporate in one day. What this shows is

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<v Speaker 1>that there's a difference between cash and value. There's a

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<v Speaker 1>limited amount of cash, but there are many different things

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<v Speaker 1>that have value to people. Cars, boats, houses, buildings, gold, land, books, roads, stocks,

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<v Speaker 1>and so on. These things all have value. In order

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<v Speaker 1>to transfer ownership, we use cash to represent that value.

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<v Speaker 1>Cash is the universal representation of value. If we didn't

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<v Speaker 1>have cash, we would have to exchange objects of equal

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<v Speaker 1>value whenever we wanted to buy something. That's called bartering,

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<v Speaker 1>and it's generally an inconvenient way to purchase things. As

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<v Speaker 1>a society, we agree to use the limited quantity of

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<v Speaker 1>cash as a universal object of value in our transactions

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<v Speaker 1>because it makes transactions a lot easier. You only need

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<v Speaker 1>a little bit of cash to handle a lot of

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<v Speaker 1>value because you don't buy and sell everything every day.

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