What you will learn
- Calculate market capitalization from a company's share price and number of shares
- Explain why you cannot judge a company's size by its share price alone
- Put the large-cap, mid-cap, small-cap, and micro-cap buckets in order
- Adjust market cap for debt and cash to understand enterprise value
A high share price does not tell you whether a company is large or whether its stock is expensive. An 800 dollar stock can belong to a smaller company than a 20 dollar stock because the number of shares also matters. Market capitalization, usually called market cap, combines price and share count and is the standard measure of a company's size in the stock market.
Market Capitalization
Video by Finance and Quant Society and a nice introduction on what exactly it is. Watch before moving on!! :)
Market cap in one formula
Market cap is the market value of all the company's shares. Multiply the price of one share by the number of shares outstanding. If a company has 10 million shares and each one trades for 50 dollars, its market cap is 500 million dollars. Use that total, rather than the price of a single share, to measure the company's size in the stock market.
Key terms
- Market capitalization
- The value of all a company's shares. Multiply share price by shares outstanding.
- Shares outstanding
- All shares the company has issued that investors currently hold.
- Enterprise value
- A broader estimate of what it would cost to buy the whole business: market cap plus debt minus cash.
- Large-cap, mid-cap, small-cap
- Informal groups that sort companies by market cap from larger to smaller.
Find the company's market cap
A company has 200,000,000 shares outstanding. Each share trades for 30 dollars. What is the market cap?
One share is only one piece
Suppose one stock costs 800 dollars per share and another costs 20 dollars. The company behind the 20 dollar stock can still be much larger if it has far more shares. A share price tells you the value of one piece of the company, and companies can divide ownership into different numbers of pieces. Market cap tells you the value of all those pieces together.
The lower-priced stock belongs to the larger company
Company A has 5,000,000 shares trading at 800 dollars each. Company B has 500,000,000 shares trading at 20 dollars each. Which company is larger?
- Calculate Company A. 800 dollars multiplied by 5,000,000 shares is 4,000,000,000 dollars, or 4 billion dollars.
- Calculate Company B. 20 dollars multiplied by 500,000,000 shares is 10,000,000,000 dollars, or 10 billion dollars.
- Compare the totals. Company B's 10 billion dollar market cap is much larger than Company A's 4 billion dollar market cap.
Why it matters: The share prices alone point you in the wrong direction. The market caps show that Company B is larger.
Share price measures one slice. Market cap measures the whole pizza.
Sorting companies by size
Investors use market cap to place companies into rough size groups. The exact dollar cutoffs change over time. In general, larger companies tend to be steadier. Smaller companies tend to have more room to grow, but they also bring more risk and larger price swings.
| Group | Relative size | How it tends to behave |
|---|---|---|
| Large-cap | The biggest, established companies | More stable with slower growth |
| Mid-cap | Companies in the middle | A mix of growth and stability |
| Small-cap | Smaller companies | More growth potential with more risk and volatility |
| Micro-cap | Very small companies | The most risk and the least liquidity |
Match size with typical behavior
Connect each market cap group with the description that usually fits it.
Adding debt and cash
Market cap measures the value of a company's shares, or its equity. Buying the entire business would also mean taking on its debt and receiving its cash. Enterprise value accounts for both: market cap plus total debt minus cash. Two companies can have the same market cap but very different enterprise values when one has much more debt. We will use enterprise value in more detail during the valuation unit.
Market capitalization explained (The Finance Storyteller)
Use this second explanation to review market cap and the size groups before you take the quiz.
Answer a friend's price question
A friend sees a stock trading at 900 dollars and says the company must be huge. Explain in two or three sentences why the share price is not enough to know that.
Write an answer before comparing it with the model response.
Model answer
The 900 dollar price tells us the value of one share, not the whole company. We need to multiply that price by the number of shares to find the market cap. A company with a 900 dollar stock and very few shares can be smaller than one with billions of shares trading at 30 dollars each.
Market cap reflects the market's current view of a company's equity value. It is not the amount of cash the company holds, and it is not a guaranteed sale price. The number updates every second while the market is open. In the final lesson, you will use market cap and the rest of this unit to build a first watchlist.