Market Capitalization Rule – Definition

Cite this article as:"Market Capitalization Rule – Definition," in The Business Professor, updated August 1, 2019, last accessed October 20, 2020, https://thebusinessprofessor.com/lesson/market-capitalization-rule-definition/.

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Market Capitalization Rule Definition

The market capitalization rule refers to a regulation created by the New York Stock Exchange (NYSE) which determines a minimum or floor market value at which a company’s stock must be listed consecutively for 30 days. The term market capitalization (market cap) stands for the outstanding company shares’ market value. The shares may include treasury shares as well as common stocks. Market cap, therefore, is a metric used to measure the size of the company.

Key Takeaways

  • The market capitalization rule refers to a regulation created by the New York Stock Exchange (NYSE) which determines a floor market value.
  • The standard value of market capitalization set in 2004, requires companies to reach a certain threshold in terms of size, in order for it to continue being listed on the NYSE (maintaining a minimum market value of $25 for 30 days in a row).
  • When a company fails to maintain the set minimum market value that enables it to qualify for listing, it is removed from the NYSE listing.

A Little More on What is Market Capitalization Rule

A standard value of market capitalization was set in 2004 that requires companies to reach a certain threshold in terms of size, in order for it to continue being listed on the NYSE. The rule was basically set so that it can control how the stock is traded in the stock exchange.

The rule gives companies an obligation of ensuring that the stock value does not go lower than $25 million for 30 days in a row in order to qualify for listing. The securities considered at the NYSE are publicly traded or quoted and can also be converted into quoted securities.

However, due to the global economic fall (downturn) in 2008-2009, the NYSE had to temporarily amend the market capitalization rules by lowering the market value to a minimum of $15 so as to qualify being listed on the NYSE.

Note that the NYSE puts into consideration the total outstanding common stock of a firm. This rule ensures that not just anyone can walk in and out of the stock market whenever they want to trade their stocks. The rule is there to ensure that companies that trade in the exchange market meet the set standards in order to qualify for listing on the NYSE.

How Market Rule Capitalization Works (Example)

For instance, let’s assume that Company XYZ’s stock has been trading at a low price which has resulted in market capitalization at $22 million for 30 days in a row. For this reason, Company XYZ will cease to be listed (delisted) on the NYSE meaning that its stock will not be traded on that exchange market.

Procedure for Delisting a Company from NYSE

When a company fails to maintain the set minimum market value that enables it to qualify for listing, it is removed from the NYSE listing. In order to delist a company from the NYSE, there is a procedure which must be followed.

Basically, the company set to be delisted is notified in writing. In the notification, the NYSE has to describe the reasons as to why they have decided to remove the company from the stock exchange list. The notification also highlights the policy that warrants delisting action by the NYSE. The notice also includes information on the rights of the company to ask for a review, following the NYSE board of directors’ decision to remove it from the stock exchange market.

References for “Market Capitalization Rule”

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