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Market Capitalization

Size It Up

Market capitalization (or just “market cap”) is a measure of a company’s total value.

If you ever read an article describing a corporation as a “$100-billion company” or saying that a business is “worth $100 billion,” the article is probably referring to market cap.

How calculated

Market cap is calculated by multiplying a company’s stock price by its total number of shares:

(Current stock price) x (Total shares outstanding) = Market cap

It basically measures the total value of all of the company’s stock.

Market cap categories

Investors mainly use market cap to sort companies by size. Although market cap categories aren’t totally standardized, investors usually divide stocks into three main buckets:

Large cap Mid cap Small cap
Market cap range $10 billion or more $2 billion to $10 billion Less than $2 billion
Business characteristics Multinational, with many different business lines, divisions, and types of products and services Growing and expanding, both with products and geographic reach Narrower business focus and geographic reach but may be growing fast
Growth Lower Moderate Higher
Risk Lower Moderate Higher

Of course, those characteristics only describe the typical profile. Any specific company may not fit the mold.

How used

In general, investors and others may use market cap anytime they want to rank companies by size or estimate a price tag for an entire company.

More specifically, it may be used:

  • By investors—to sort or rank potential investments
  • By investment managers—to define their investment strategy
  • By index providers—to decide which companies to include in a market index
  • By corporations—to look for companies they might acquire

A company’s market cap can also give clues as to its likely growth rate and the types of risks it may face, which can be helpful to lots of users.

Market cap vs. alternatives

Unlike when you check your account balance at the bank, putting a dollar value on a company is subjective and squishy. Market cap is one way, but it’s not the only one. Enterprise and book value are two other often cited measures. Here’s how they stack up:

Market cap Enterprise value Book value
Formula
Stock price
x
shares outstanding
Market cap
+
total debt
-
cash
Total assets
-
total liabilities
What it shows How the stock market values the company What a potential acquirer might pay to buy the company What the company would be worth if it were liquidated
Pros Available easily in real time Provides a fuller picture of value More objective
Cons Glosses over lots of details Different ways of calculating mean it’s not always comparable Not so relevant for successful healthy companies

Good to know

Experts often recommend investing in a mix of larger and smaller companies as one way to diversify your portfolio.

Large-cap stocks may deliver lower returns over the long run but often hold up better in a downturn. Stocks of small-cap companies may be more volatile but can also give you a chance at getting in on the Next Big Thing. And mid-cap stocks can give you a risk-reward mix that’s somewhere in the middle.

Conclusion

Market capitalization or “market cap” is a measure of a company’s value that’s determined by its stock price. Investors and others may use market cap as a quick and easy way of sorting companies by size. Investing in a mix of companies of different sizes is one way experts often recommend for diversifying your portfolio.

Fun facts

  • Apple was the first U.S. company to surpass both the $1 trillion and $2 trillion market capitalization marks.
  • A single share of Warren Buffett’s company, Berkshire Hathaway, is worth more than $300,000. That’s about ten times the price Buffett paid for his own house.
  • Small, medium, and large aren’t the only market cap games in town. There are also “mega caps,” “smid caps,” “micro caps,” and “nano caps” to choose from.

Key takeaways

  • A company’s market capitalization is a measure of its value that’s based on real-time changes in its stock price.
  • Market cap is calculated by multiplying a company’s shares outstanding by its current stock price.
  • There are three main categories of market capitalization: large, mid, and small caps.
  • A company’s market cap may determine which stock index it’s included in or whether another company decides to acquire it.
  • Market cap can also help investors understand how much potential risk and reward a particular company’s stock could offer.

Market cap is a company’s worth. It’s also the hat you wear to the grocery store.

Napkin Finance

References

  1. https://www.nytimes.com/2020/08/19/technology/apple-2-trillion.html
  2. https://finance.yahoo.com/quote/AAPL/history?p=AAPL
  3. https://finance.yahoo.com/quote/BRK-A?p=BRK-A
  4. https://www.spglobal.com/spdji/en/indices/equity/sp-500/
  5. https://www.spglobal.com/spdji/en/indices/equity/sp-400/
  6. https://www.spglobal.com/spdji/en/indices/equity/sp-600
  7. https://www.barchart.com/stocks/indices/sp/sp400
  8. https://www.barchart.com/stocks/indices/russell/russell2000
  9. https://www.barchart.com/stocks/indices/sp/sp500
  10. https://www.barchart.com/stocks/indices/sp/sp600
  11. https://www.macrotrends.net/stocks/charts/BRK.B/berkshire-hathaway/market-cap

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