Market capitalization: What it is and how to calculate it

After linking the enterprise values for each company from the prior steps, we’ll subtract net debt amounts this time around to arrive at the market value of equity. In the next part of our tutorial, we’ll calculate the enterprise value starting from the market cap or equity value. Note that although it is not explicitly broken out here, the weighted average of the diluted share count should be used when calculating the market cap of companies.

  1. For example, small-cap value stocks typically offer more potential upside than large-cap growth stocks but may also involve greater risk due to their lack of liquidity.
  2. “The bottom line is that small-cap stocks provide higher returns, on average — but that comes at the cost of greater risk.”
  3. While small-caps tend to be volatile and rarely offer dividends, they have a lot of growth potential and are often undervalued.
  4. Because different corporations have different amounts of shares available for trading, the market cap produces an apples-to-apples comparison regardless of the actual price of a company’s stock.
  5. The trend in a company’s market capitalization over time can provide insights into the company’s financial performance and growth potential.

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. “The bottom line is that small-cap stocks provide higher returns, on average — but that comes at the cost of greater risk.” 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. If you can measure a company’s value, you’ll be in a better position to know whether you want to commit your hard-earned capital to its stock.

While small-caps tend to be volatile and rarely offer dividends, they have a lot of growth potential and are often undervalued. 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. After a company goes public and starts trading on the exchange, its price is determined by supply and demand for its shares in the market.

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But this category of companies is actually made up of many reputable businesses and they tend to perform relatively well. It is equal to or less than N because N includes shares that are restricted from trading. The free-float market cap uses just the floating number of shares in the calculation, generally resulting in a smaller number. Companies that are considered large-cap have a market cap between $10 billion to $200 billion. For example, in Q2 2022, International Business Machines Corp. (IBM) and General Electric (GE) are large-cap stocks with market caps of $116 billion and $99 billion, respectively. A company’s market cap can tell you how much the larger stock market has determined that company is worth.

What is market capitalization?

Other metrics such as financial performance, industry trends, and market conditions should also be taken into account. Consistently profitable companies usually have market values that are greater than their book values. Investors have confidence in the company’s ability to generate growth in both revenue and earnings.

They may not have the same growth potential as smaller companies, but they provide dividends to investors and are more likely to increase in value over time. 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.

How to Calculate Market Capitalization?

In such a case, simply multiply the share price by the number of available shares. Market capitalization refers to the total dollar market value of a company’s outstanding shares of stock. The investment community uses this figure to determine a company’s size instead of sales or total asset figures. Market cap is the total value of a market capital company’s outstanding shares, while market value is the buying or selling price of a specific asset.

Market cap is also used to compare and categorize the size of companies among investors and analysts. Investors who don’t want to take as much risk may want to root their portfolio trading central in less-volatile large- and mega-caps, with a lower allocation of small- and mid-caps. The Russell 2000 Index tracks small-cap companies including all of the above.

Such indexes not only represent the overall market developments and sentiments, but are also used as benchmarks to track the performance of various funds, portfolios, and individual investments. For example, a company whose IPO value is set at $100 million by its investment bank may decide to issue 10 million shares at $10 per share or they may equivalently want to issue 20 million at $5 a share. For instance, a small-cap growth stock should not be compared with a large-cap value stock. Mega-cap, on the other hand, has a looser definition, but covers those behemoths with market caps of anywhere between $200 billion and more than $1 trillion. If a company issues 100 million shares, and all 100 million are held by shareholders, then the number of outstanding shares a company has is 100 million.

Some traders and investors, mostly novices, can mistake a stock’s price to be an accurate representation of that company’s worth, health, and/or stability. They may perceive a higher stock price as a measure of a company’s stability or a lower price as an investment available at a bargain. Market capitalization is the correct measure to look at, as it represents the true value as perceived by the overall market. Many have virtually zero track record, and it’s possible they don’t even have any assets, operations or revenue to report.

The market capitalization formula is simply the enterprise value minus net debt. But since we have switched the sign convention when linking to the hard-coded values, we can just add the two cells. If your goal leans more toward stability, you can focus on large-caps, but you can also include smaller companies with growth potential to provide some extra juice to the portfolio. Market capitalization can impact how you construct an investment portfolio. Experts generally recommend diversification, meaning owning a combination of small-, mid- and large-cap companies.

One of the ways you can use market capitalisation to evaluate your investments is by looking at how companies are divided up by market cap, as it generally gives you an indication of how large a company is. A lot of major stock indices use float-adjusted market capitalisation, including the Dow Jones Industrial Average and FTSE 100 Index. Share prices are not fixed and will move up or down based on a number of market factors, including the financial performance of the company, political headlines, and wider economic data. When the number of outstanding shares in a company rises or falls, it tends to have an impact on the company’s share price.

There are several funds that track the Russell 2000, such as iShares Russell 2000 ETF and Vanguard Russell 2000 ETF. Though used less frequently, micro- and mega-cap are terms used to cover those companies that sit either side of the large-mid-small spectrum. This number can rise, if a company issues more shares to raise capital, or can fall, in the case of a share buyback programme, for example. This will include closely held stock, restricted stock and floating stock, but not treasury stock (which is stock held in reserve by the company itself).

Market cap is the most representative guideline for analysis and a base for all other financial metrics. Market value can be dependent on numerous other factors, such as the sector in which a company operates, its profitability, its debt load, and the overall market environment. Market cap is often referred to as the value of a company or what a company is worth but a company’s true market value is infinitely more complex. In the final section of our tutorial, we’ll practice the calculation of market cap starting from enterprise value. The important takeaway is the impact of different capital structures – i.e. the net debt amount – on equity value and enterprise value. In effect, the formula isolates the value of the company belonging solely to common equity shareholders, which should exclude debt lenders, as well as preferred equity holders.

A company’s share price can also fluctuate enough to move it into a higher or lower market-cap category. The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. It is an important tool for analytics, especially when comparing companies.






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