What is market capitalisation (market cap)?
Market capitalization, commonly known as market cap, is a measure used to determine the value of a publicly traded company. In the stock market, the market cap is an important metric that helps investors gauge the size and performance of a company relative to its peers.
The market capitalisation of a corporation is derived from this equation: the number of shares outstanding multiplied by the share’s current market price. The result is a company’s total market value, representing the theoretical cost of buying all of its outstanding shares.
For example, a company with 1 million outstanding shares and the share’s current market price of $100 has a market cap of $100 million (1 million shares x $100 per share).
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Market cap is a crucial indicator for investors as it provides a rough idea of a company’s size and performance in the stock market. A company with a higher market cap is more significant and valuable than a lower market cap.
Take a look at a few companies with the biggest market cap. You can clearly see how this metric affects the company’s size.
Apple market cap chart, source: The New York Times
What types of market cap companies are there?
There are different categories of market cap that companies can fall into. These categories define the company’s size and determine which index or benchmark it belongs to. The three main types are:
- Large-cap: Companies with a market cap of over $10 billion are considered large-cap companies. These companies are typically well-established and have a long track record of performance.
- Mid-cap: Mid-cap businesses have a market capitalization from $2 billion to $10 billion. These companies are usually in a growth and expansion stage and may have more volatility in their stock price.
- Small-cap: Companies with a market cap of less than $2 billion are considered small-cap companies. These companies are typically newer and smaller and may have more risk associated with their stock price.
Investors use the market cap to help them make investment decisions. Large-cap companies are generally more stable and less risky than small-cap companies, but they may also have less growth potential. On the other hand, small-cap companies may have more growth potential but may also be riskier investments.
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Stock market indexes also use the market cap to determine which companies should be included in the index. For example, the S&P 500 index consists of the 500 largest companies in the United States by market cap. Companies that have a market capitalisation below a certain threshold are not included in the index.
It’s important to note that market cap is not the same as a company’s total asset value or revenue. A company’s market cap is based on the current stock price and the number of outstanding shares. In contrast, the company’s total asset value and revenue are based on its financial statements.
Market cap changes quickly
The market cap can change over time as a company’s stock price and the number of outstanding shares change. So, for example, a company can change categories (from large-cap to mid-cap) as its market cap grows or shrinks.
Moreover, it is important to note that market circumstances and investor sentiment can impact market capitalization. In a bull market, where stock prices generally rise, a company’s market cap may increase even if its underlying fundamentals haven’t changed. Conversely, in a bear market, where stock prices usually fall, a company’s market cap may decrease even if its underlying fundamentals are strong.
In conclusion, market cap is an important metric for investors to consider when evaluating stocks. It provides a rough idea of a company’s size and performance in the stock market and can help investors make investment decisions. However, it’s important to remember that market cap is just one of many factors to consider when evaluating a company’s potential as an investment.