Market Capitalization: How It Works And Its Formula


If the number of shares outstanding increases, a company’s market capitalization will rise, unless its share price falls to a degree that more than offsets the value of those newly issued shares. Market capitalization, or “market cap”, is a measure of how large a company is. The size of a company is important because some investors choose to target larger or smaller companies to invest in. A balanced portfolio strategy may involve including equity investments in companies of various sizes. Market cap essentially measures how valuable the market perceives a company’s equity to be at a given time. Market capitalization is the dollar amount the stock market is valuing a company at.

  1. Although it is used to describe a company, market capitalization does not measure the equity value of a company.
  2. A company with net cash will have an enterprise value less than its market cap.
  3. Other factors, such as our own proprietary website rules and whether a product is offered in your area or at your self-selected credit score range, can also impact how and where products appear on this site.
  4. Market cap is also used to compare and categorize the size of companies among investors and analysts.

However, if a company has a net debt position, its market capitalization will be lower than Enterprise Value. Mid-caps are companies with a market capitalization between $2 billion and $10 billion. Sometimes investors classify stocks that are much larger than large-cap as mega-caps, while those smaller than small-cap are sometimes called micro-caps or even nano-caps. If you’re building a portfolio yourself, it can be a lot of work to analyze and choose individual companies to invest in, plus assemble a well-diversified portfolio of individual stocks. ETFs and mutual funds might be able to help you achieve your targeted asset allocation, including your desired allocation among market-cap segments, without having to research hundreds of companies yourself.

What Does Market Cap Mean For Stocks?

Suppose we’re tasked with calculating the market capitalization and the enterprise value of three different companies that operate in the same (or adjacent) industry. Outstanding shares are the total amount of shares currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. Assume the options and warrants have a strike price of $5 (i.e., the option and warrant holders pay $5 per share for the stock valued at $10). Those options and warrants will each bring in another $50 million in cash (as the $5 strike price for the 10 million options and the 10 million warrants will be paid to the company).

Shares are often over- or undervalued by the market, meaning the market price determines only how much the market is willing to pay for its shares. Large-cap companies typically have a market capitalization arbitrage trading and cryptocurrency traders of $10 billion or more and represent major players in well-established industries and sectors. These companies generally reward investors with a consistent increase in share value and dividend payments.

The risk here is the highest among these three groups, but they might give investors the highest return on investment. The different measurement of Market Cap values also form the basis to launch a variety of market indexes. Free float market cap is not a commonly used metric in fundamental analysis. It’s more commonly used by index providers, and rarely an issue in North America, where less than 10% of shares are excluded from this calculation. A company with net debt will have an enterprise value greater than its market cap. A company with net cash will have an enterprise value less than its market cap.

With a solid understanding of market cap now under your belt, here are some ways to consider using it as you’re researching investments and constructing your portfolio. Despite their identical market caps, Company C has an enterprise value that is $1.2bn greater than that of Company A in comparison. Once we add the $4bn in market cap to the corresponding net debt value of each company, we get different enterprise values for each. Under the treasury stock method (TSM), the common share count factors in the exercise of potentially dilutive securities, resulting in a higher number of total common shares. The Market Cap, or “Market Capitalization,” is the total value of a company’s equity from the perspective of its common shareholders. Some of the companies may or may not be industry leaders, but they may be on their way to becoming one.

What could impact a company’s market cap?

In the final section of our tutorial, we’ll practice the calculation of market cap starting from enterprise value. Market cap is also used to compare and categorize the size of companies among investors and analysts. Mercedes Barba is a seasoned editorial leader and video producer, with an Emmy nomination to her credit. Presently, she is the senior investing editor at Bankrate, leading the team’s coverage of all things investments and retirement. Any estimates based on past performance do not a guarantee future performance, and prior to making any investment you should discuss your specific investment needs or seek advice from a qualified professional. The securities of smaller, less well known companies can be more volatile than those of larger companies.

Market Cap Calculation Example

However, a mid-cap or micro-cap company making a similar value investment may be susceptible to big blows if their venture fails as they don’t have that bigger cushion to absorb the failure. If the venture succeeds for large-cap companies, it may appear small in their profit numbers. But if the company scales up with its success, it can lead to profits of larger magnitudes. On the other hand, the success of such ventures for a mid-cap company can bolster its valuations to significant heights. Small-cap companies have a market cap between $300 million to $2 billion.

When small caps are successful, they might be able to show fast growth and strong stock gains. But because these companies may be less stable, less well-established, and have less access to cash, they might also be more vulnerable to downturns or even failure, and so can come with greater risk. Anything that impacts a company’s stock price will also impact its market cap. For example, if a company is perceived as successful, perhaps due to new products or growing profits, investors may want to get in on the action and buy shares. The price of that company’s stock may then rise, driving the market cap up along with it.

First, from a purely financial standpoint it essentially defines the success of the corporation. Market cap is the equity value of the company; looked at another way, it is the total value (on paper) of all of the shareholders’ holdings. Then using your time horizon and risk tolerance as benchmarks, you can build out a diversified selection of investments. That said, there is a place for mid- and small-caps in certain portfolios. It’s the smaller players where you can sometimes find value,” says Holmes Osborne, principal at Osborne Global Investors in Missouri. In conclusion, the market cap we are left with for each company is $4bn again, confirming that our prior calculations were correct.

What Is the Importance of Market Cap?

A company with 20 million shares selling at $100 a share has a market cap of $2 billion. A second company with a share price of $1,000 but only 10,000 shares outstanding, has a market cap of $10 million. Generally, investments in mega-cap or large-cap how to buy tomocoin tomo how to sell tomocoin tomo stocks are considered more conservative with less volatility than investments in small-cap stocks. Comparing the two companies by solely looking at their stock prices would not give a true representation of their actual relative values.

It is common to see companies making transitions from one category to the other depending upon the change in their market cap valuations regularly. Along with companies, other popular investments like mutual funds and exchange-traded funds (ETFs) are also categorized as small-cap, mid-cap, or large-cap. In the case of funds, the terms represent the types of stocks in which the fund primarily invests.

Companies with a market capitalization between $250 million and $2 billion are commonly classified as small-cap companies. These companies are considered higher-risk investments due to their age, the markets they serve, and their size. Small-cap share prices may be more volatile but provide greater growth opportunities than large caps. The investing community often uses market capitalization value to rank companies and compare their relative sizes in a particular industry or sector. To determine a company’s market cap, simply take its current market share price and multiply the figure by the total number of shares outstanding. In stocks, market cap is calculated by multiplying the number of shares outstanding by the stock price.

In fact, though it’s rare, a company can in fact have a negative enterprise value, which simply means that net cash is greater than the market capitalization. Indeed, to oversimplify, the point of even being a public company, or developing a useful cryptocurrency, is to increase market cap. And investors can’t properly choose the companies that will drive those increases without understanding exactly what market cap is, and what it means. Market capitalization is a fundamental piece of information needed to make investment decisions, and gives a big-picture view of the value of a company. However, market cap can fluctuate greatly day-to-day, especially in smaller companies, as the stock bounces around. The offers that appear on this site are from companies that compensate us.

First Solar (FSLR), is a mid-cap leader in the solar power field, with a market cap of around $8 billion as of Q2 2022. An investor might say, for instance, that a stock has an attractive valuation. By implication, that refers to market cap, but the statement focuses more broadly on the stock’s fundamental attributes.

However, if the company’s market cap is four times as large, the argument could be made that the company is underperforming. Note that although it is not explicitly broken out here, the weighted average of the diluted share count should apis and api design with python be used when calculating the market cap of companies. For privately held companies, this particular approach is the only viable method to compute equity value, as these companies do not have a readily available public share price.