What is Market Capitalization?

What It's About

Understand what market cap means and how you can use this knowledge to make more informed trading decisions.

Market capitalization, or market cap, is the total value of all a company’s outstanding stock. The value is figured by multiplying the stock price by the the company’s total number of shares. Market cap is also a shorthand way of saying the value of the company or what it would cost an investor to buy all the company’s stock. Market cap is not a fixed number, because as the stock price and share count fluctuate, so does the market cap.

Different types of market cap

Investors often use shorthand to refer to the size of a company. Here are the three main classifications of market cap, with approximate ranges:

  1. Small cap — Market caps between $200 million and $2-$3 billion
  2. Mid cap — Market caps from $2 billion up to $10-$12 billion
  3. Large cap — Market caps above $10-$12 billion

These value ranges are only estimates, and they move up over time as the market grows. Investors also refer to two other value ranges, though they’re less common.

  1. Micro cap — Market caps below $200 million
  2. Mega cap — Market caps above $50 or $100 billion

The definition of mega cap is more open to interpretation, but refers to the market’s largest companies. Even if the cutoff for mega cap is $50 billion — and that’s already a big company — it still pales in comparison to the market’s biggest companies, such as Apple and Amazon, whose market caps have topped $1 trillion, nearly 20 times larger than the smallest mega cap.

Why do investors care about market cap?

Market cap is important because it shows how investors value a company’s future profits. But sometimes key milestones, such as a $1 trillion market cap, become psychological checkpoints, as was the case with Apple’s recent move into trillion-dollar territory amid a race to see which company would get there first. These thresholds are fun for the media but largely irrelevant.

So is bigger better? Sharp investors know that market cap is often negatively correlated with growth. The bigger a company is, the harder it is to grow sales and profits. But a larger company is also more financially stable, and has more resources to draw on.

Investors care about market cap because, among other things, it tells them the kind of company that they’re purchasing

While they’re only part of the total stock market, these big companies comprise the major indexes that you hear about — the Dow Jones Industrial Average, the S&P 500, and the Nasdaq Composite. The moves of these large companies are what the media is discussing when it talks about “the stock market.” However, that discussion leaves out small-caps and mid-caps.

In contrast to large-caps, the land of small-caps is where the next superstar company tends to emerge from, so investors want to ride this growth over time to wealth. Small-caps tend to grow faster, so they usually have a higher price-earnings ratio (or P/E ratio) than mid-caps and large-caps. That is, investors tend to value small-caps more highly for each dollar of profit than large companies. But small-caps tend to be riskier and less stable than larger companies.

Finally, market cap is important to fund managers that create ETFs and mutual funds, because investors demand funds with specific characteristics, such as having only small-caps or only mid-caps or only large-caps. Investors care about market cap because, among other things, it tells them the kind of company that they’re purchasing — a riskier small company that has the potential to grow, a larger slower-growing company, or a company somewhere in between.

By Mackenzie O'Connor
Wealthbase Contributor

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