Market capitalization (aka “market cap”) is one key way to measure the size of a company by simply multiplying its total number of shares by its stock price.
🤔 Understanding market capitalization
Market capitalization (aka “market cap”) shows the dollar value of a company’s outstanding shares. To get this number, multiply the company’s total number of shares by the price of each share. As the price of the stock or the number of shares outstanding changes, so will its market cap. Companies can be sorted into three market cap categories: “small cap” ( $300M- $2B), “mid cap” ($2B- $10B), and “large cap” ($10B+). In general, smaller companies are more risky than larger ones — But in some cases, they can also have a much higher growth potential.
Apple became the first company in history to reach a $1 trillion market cap on August 2, 2018. Doing the math: Its nearly 5 billion shares * the $207.05 share price it hit that day = $1 trillion. Amazon and Microsoft are other companies that have also joined the market cap “four comma club.”
Calculating the value of oranges by multiplying the number of oranges times the cost per fruit is like calculating the market capitalization of a company...
It’s the value of all of the shares people own, and helps quickly put a rough price tag on an entire company.
How is market cap calculated?
You only need two numbers to calculate a company’s market cap: the total number of outstanding shares of a company — including those held by officers and insiders, as well as people like us who own shares — multiplied by the real-time price of that stock. Because the share price of private companies isn’t publicly known, market cap typically refers to publicly traded stocks. The simplicity of the market cap formula makes it a convenient way to quickly judge the size of different companies. But there are also more nuanced ways to value a company or estimate the price tag of the whole shebang.
Here are the three main categories of market cap to keep in mind (as of Jun 6, 2019):
Small cap: Between $300 million and $2 billion
Examples: Axcelis Technologies (semiconductors), Spectrum Pharmaceuticals, Dave & Buster’s (restaurant and entertainment)
Mid cap: Between $2 billion and $10 billion
Examples: Sallie Mae (consumer banking), Amarin (drugmaker), Royal Gold (precious metals)
Large cap: $10 billion+
Examples: Amazon (technology), Coca-Cola (beverages), Tesla (automotices), Walmart (retail)
While small, mid, and large are the most traditional categories, labels have been made for the extremes as well:
Micro cap: Between $50 million and $300 million
Mega cap: Greater than $300 billion
What is the difference between market cap and market value?
Want to know how much a company can be sold for? That’s its market value — the value that the company is worth in the market.
For public companies, the market value is easy to calculate — it’s the market cap.
For private companies it’s a more nuanced and subjective calculation. Since private companies don’t have freely tradable shares, it’s not entirely clear how much shares are worth. That’s why calculating the market value of a private company requires taking into account the nitty and gritty of the business, from its debts to its growth prospects, taxes, and more. The estimate often incorporates more fuzzy analysis, too — for instance, a company’s potential to innovate down the line, what investors are opining on, and broader trends in the relevant industry.
In the finance world, these value-judging skills are possessed by investment bankers who use ratios called “multiples.” Multiples let you take one known metric of a company and turn it into an estimated market value. Calculating the market value of a private company is tougher than estimating the value of a public company. That’s why the task is usually left to investment bankers who use more complex modeling to come up with the final number.
Which US companies have the highest market caps?
Anyone interested in investing can use market caps as a way of loosely categorizing the value of a company. People are often curious to know the largest companies by market cap to get a signal as to which businesses and industries are the most valuable at any given time.
Top 10 market caps as of June 6, 2019:
Microsoft Corp. $979B
Amazon.com Inc. $864B
Apple Inc. $852B
Alphabet Inc. $725B
Berkshire Hathaway Inc. $503B
Facebook Inc. $480B
Visa Inc $365
BJohnson & Johnson $363B
JPMorgan Chase & Co $360B
Exxon Mobil Corp $314B
Why do market caps matter?
Market caps can be helpful to investors for two main reasons:
Market caps are a quick way to get a feel for the size of a company and its maturity (whether it’s a fledgling public company or cranking in its prime working years).Market cap can also be a tool for gauging the riskiness of an investment. Companies with smaller market caps tend to have less mature businesses, while large cap companies tend to have a more established market position.
Why stock splits don’t affect market cap
A stock split happens when a company wants to decrease the price of its stock — So it splits shares into multiple, smaller ones.
For example, say a company’s stock price is $500 (that’s pretty high). It might want to cut each share into 10 equally-sized shares of $50 each.
For a shareholder, this doesn’t really change anything — if the investor owned one share before, worth $500 total (1 x $500). After the split, he or she owns 10 shares that are also worth $500 total (10 x $50).
The market cap is also not affected by a stock split. The total number of shares increases, but that effect is offset by a proportional decrease in the price of each share.
It’s kind of like cutting a pizza into 12 slices instead of 6. It’s still 1 pizza.