Market capitalization: What it is and how to calculate it

These generalizations are no guarantee that any particular large-cap company will weather a downturn well or that any particular small-cap company will or won’t thrive. Still, market cap can be a useful gauge—particularly when it comes cryptocurrency trading strategy books porting algorthims from quantopian to quantconnect to diversifying your portfolio. When you diversify, you aim to manage your risk by spreading out your investments. You can diversify by investing among different asset classes; for example, by investing in both stocks and bonds.

While small-caps tend to be volatile and rarely offer dividends, they have a lot of growth potential and are often undervalued. Market capitalization, or market cap, is one measurement of a company’s size. It’s the total value of a company’s outstanding shares of stock, which include publicly traded shares plus restricted shares held by company officers and insiders. The market capitalization metric, often abbreviated as “market cap”, represents the total value of a company’s equity, most often measured to analyze the valuation of publicly-traded companies. Essentially the collective price of all of a company’s outstanding shares, market capitalization tells us about the value that investors put on a company’s stock.

  1. In the final section of our tutorial, we’ll practice the calculation of market cap starting from enterprise value.
  2. Market capitalization, or market cap, is the total value of a company’s shares of stock.
  3. And that tells us, indirectly, about what we can expect from the company in terms of returns.

Large-cap companies typically have a market capitalization 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. Examples of large-cap companies include Apple Inc., Microsoft Corp., and Alphabet Inc.

Certain stock indexes or investment funds will use this measure to group companies together by size. For example, the S&P 500 is made up of mega-cap and large-cap stocks and is weighed by market cap, so companies with a higher market cap account for relatively more of the index than companies with a comparatively smaller market cap. Market cap is calculated by multiplying the number of stock shares outstanding by the current share price.

Stock Price and Shares Outstanding Assumptions

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. You’ll sometimes hear “market capitalization” used interchangeably with “market value.” But they don’t mean the same thing. Whereas market capitalization is a single, easy-to-calculate figure, market value is a more complex characteristic that we try to estimate in a number of ways. One of the most common ways to evaluate public companies is by market capitalization, or “market-cap” for short. A big part of equity investing is trying to figure out what a company is worth.

Market Capitalization: What It Means for Investors

Market capitalization, or “market cap”, is the aggregate market value of a company represented in a dollar amount. Since it represents the “market” value of a company, it is computed based on the current market price (CMP) of its shares and the total number of outstanding shares. Long-term investors — for example, those saving for retirement that’s decades away — could benefit from the potential growth of small- and mid-cap companies and still have time to weather unexpected downturns. Understanding market capitalization is important when it comes to selecting your investments because it can help evaluate an investment’s total opportunity.

That’s why it’s a good idea to look at a number of metrics when considering an investment. Market cap can be one tool you use to develop a diverse portfolio, but it shouldn’t be your only tool. FINRA Data provides non-commercial use of data, specifically the ability to save data views and create and manage a Bond Watchlist.

Market Capitalization

Because of their growth orientation, they may be riskier since they spend their revenues on growth and expansion. Small-cap stocks are therefore often more volatile than those of larger companies. Generally, large-cap stocks experience slower growth and are more likely to pay dividends than faster-growing, small- or mid-cap stocks. With billions of dollars worth of valuation, a large-cap company may have more room to invest a few hundred millions in a new stream of business and may not take a big hit if the venture fails. 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. One example is Bed Bath & Beyond Inc. (BBBY) which has a market cap of $2 billion as of Q2 2022, putting it right on the high-end of small cap stocks. Track records of such companies aren’t as long as those of the mid-to-mega-caps, but they also present the possibility of greater capital appreciation.

Large-cap companies tend to be less vulnerable to the ups and downs of the market than mid-cap companies, and mid-cap companies are generally less susceptible to volatility than small-cap companies. Small-cap stocks are often young companies with the potential for high growth. These stocks may have the possibility of high returns (that small-cap could indeed grow to be a mid- or large-cap), but they also come with the possibility of significant losses. The simplest calculation of enterprise value is market capitalization plus net debt.

Registered representatives can fulfill Continuing Education requirements, view their industry CRD record and perform other compliance tasks. Pete Rathburn is a copy editor and fact-checker with expertise in economics and personal finance and over twenty years of experience in the classroom.