Market Capitalization
Market capitalization (market cap) is the total market value of a company's outstanding shares, calculated by multiplying the current stock price by the number of shares outstanding. It's used to classify companies as large-cap, mid-cap, or small-cap.
Exam Tip
Market Cap = Price × Shares. Large-cap = $10B+. Small-cap = under $2B. Stock price alone doesn't indicate size!
What is Market Capitalization?
Market capitalization (market cap) measures a company's total value as determined by the stock market. It represents what the market believes the company is worth based on its current stock price and the total number of shares available.
Market Cap Formula
Market Cap = Current Stock Price × Shares Outstanding
Example Calculation
| Company | Stock Price | Shares Outstanding | Market Cap |
|---|---|---|---|
| Company A | $150 | 1 billion | $150 billion |
| Company B | $50 | 500 million | $25 billion |
| Company C | $10 | 100 million | $1 billion |
Market Cap Categories
| Category | Market Cap Range | Characteristics |
|---|---|---|
| Mega-Cap | $200B+ | Largest global companies |
| Large-Cap | $10B - $200B | Established, stable |
| Mid-Cap | $2B - $10B | Growth potential with stability |
| Small-Cap | $300M - $2B | Higher growth, higher risk |
| Micro-Cap | $50M - $300M | Speculative, high risk |
| Nano-Cap | Under $50M | Very small, often penny stocks |
Why Market Cap Matters
| Use | Application |
|---|---|
| Index Inclusion | S&P 500 requires large market cap |
| Fund Classification | Determines "large-cap fund" vs "small-cap fund" |
| Risk Assessment | Larger = generally more stable |
| Liquidity Indicator | Larger = typically more liquid |
Market Cap vs. Other Metrics
| Metric | What It Measures | Includes Debt? |
|---|---|---|
| Market Cap | Equity value only | No |
| Enterprise Value | Total company value | Yes |
| Book Value | Accounting value | No |
Market Cap and Investment Style
| Cap Size | Risk | Growth Potential | Dividend Likelihood |
|---|---|---|---|
| Large-Cap | Lower | Moderate | Higher |
| Mid-Cap | Moderate | Moderate-High | Moderate |
| Small-Cap | Higher | Higher | Lower |
Important Considerations
- Stock Price Alone Doesn't Matter: A $500 stock isn't "bigger" than a $50 stock—market cap determines size
- Changes Daily: As stock prices move, market cap changes
- Splits Don't Affect It: Stock splits change price and shares but not market cap
- Free Float: Some indices use "float-adjusted" market cap (only tradeable shares)
Examples of Market Cap Tiers
| Tier | Example Companies (2024) |
|---|---|
| Mega-Cap | Apple, Microsoft, Amazon |
| Large-Cap | Goldman Sachs, FedEx, Target |
| Mid-Cap | Crocs, Five Below, Shake Shack |
| Small-Cap | Many regional banks, small retailers |
Exam Alert
Market cap = Price × Shares Outstanding. Used to classify stocks as large, mid, or small cap. Stock price alone does NOT indicate company size!
Study This Term In
Related Terms
Common Stock
SecuritiesCommon stock is a security representing ownership in a corporation, giving shareholders voting rights and potential dividends.
Stock Split
SecuritiesA stock split is a corporate action that divides existing shares into multiple shares, reducing the price per share proportionally while maintaining the same total market value.
Index Fund
SecuritiesAn index fund is a mutual fund or ETF designed to track the performance of a specific market index (like the S&P 500) by holding the same securities in the same proportions, offering broad diversification with low fees.
Diversification
GeneralDiversification is an investment strategy that spreads investments across various assets, sectors, or geographic regions to reduce risk without necessarily sacrificing returns.