Market Capitalization: What It Is and Why It Matters

By researching and monitoring the news, you can formulate a strategy based on your risk tolerance and get your desired returns. You can also ensure that your portfolio is well-diversified and free from unnecessary risks. The key takeaway here is that there’s no one right way to invest based on market cap — every investor has to take the time to develop a strategy that works.

Although the number of outstanding shares and the stock price change, a company’s market cap remains constant. If a company issues a dividend—thus increasing the number of shares held—its price usually drops. Market cap is based on the total value of all a company’s shares of stock. Float is the number of outstanding shares for trading by the general public.

  1. Market cap is calculated by multiplying a company’s outstanding shares by the current market price of one share.
  2. This can be due to a variety of factors, such as poor financial performance, increased competition, regulatory changes, or management issues.
  3. Often used interchangeably with the term “equity value,” a company’s market capitalization measures the value of its common equity as of the latest market close.
  4. These two terms are closely related — a company’s market capitalization gives investors an indication of how much they would have to pay to buy all of its outstanding shares at any given time.
  5. By comparing the market capitalization of companies in different industries, you can get a sense of which industries are currently performing well and which ones may be struggling.

They offer greater room for aggressive growth, but with that opportunity for reward comes a high level of risk. Mid-cap companies have a market cap between $2 billion and $10 billion and are positioned for rapid growth, making them less risky than small caps but riskier than large caps. They excel in specific sectors as niche players, offering a balance of growth and stability.

Market Capitalization Template

It is considered a more conservative measure of a company’s total value compared to the basic market capitalization, which only takes into account the outstanding common shares. Market capitalization, also known as market cap, is calculated by multiplying a company’s current stock price by the total number of outstanding shares. Since market capitalization is based on the volume of outstanding shares and the price per share, changing either will cause a market cap to rise or drop. The most obvious way a company’s market capitalization can increase is to increase its stock’s value (i.e., for its price per share to rise). This essentially means a company meets or exceeds performance expectations and is rewarded by having investors want to buy shares of their company, which in turn drives up the price of each share. Understanding market capitalization is important when it comes to selecting your investments because it can help evaluate an investment’s total opportunity.

Mid-Cap Companies

Knowing the total value of stocks can help investors distinguish between risky and conservative investments, or help them to diversify based on their particular goals. For example, large companies might be more stable with less room for growth in their returns, but might be the right choice for a portfolio with a short time horizon or an investor with a low risk tolerance. Market capitalization, or market cap, provides part of the information to make these decisions. Market capitalization (market cap) is the total value of a company’s outstanding shares of stock. It is calculated by multiplying the current market price of one share by the total number of outstanding shares.

For example, a company priced at $20 per share and with 100 million shares outstanding would have a market capitalization of $2 billion. Mid-cap companies generally have a market capitalization of between $2 billion and $10 billion. Mid-cap companies are established companies that operate in an industry expected to experience rapid growth. They carry an inherently higher risk than large-cap companies because they are not as established, but they are attractive for their growth potential. When diversifying your portfolio across companies of different market caps, consider the length of your investment horizon. A longer horizon can potentially absorb volatility, benefiting long-term investors, like those saving for retirement.

Editorial disclosure

As an investor, you should have all three types of stocks in your portfolio for better diversification and growth potential. To measure the returns of a stock, use the S&P 500 index for large-cap stocks, S&P MidCap 400 index for mid-caps and either the S&P SmallCap 60 or Russell 2000 indices for small-cap stocks. Additionally, many mutual fund companies have funds that specifically invest in the same market capitalization stocks to aid you in further diversification. As a company’s market capitalization rises, it gains perceived value, driven by positive financial performance, favorable market conditions, or increased investor confidence.

Companies that have a market capitalization of between $300 million to $2 billion are generally classified as small-cap companies. These small companies could be younger and/or they could serve niche markets and new industries. These companies are considered higher-risk investments due to their age, the markets they serve, and their size. Smaller companies with fewer resources are more sensitive to economic slowdowns. Understanding what a company is worth is an important task and often difficult to quickly and accurately ascertain.

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. Although it is used often to describe a company, city index review the market cap does not measure the equity value of a company. It is inadequate to value a company because the market price on which it is based does not necessarily reflect how much a piece of the business is worth.

Whereas market capitalization is a single, easy-to-calculate figure, market value is a more complex characteristic that we try to estimate in a number of ways. This material is not intended as a recommendation, offer or solicitation for the purchase or sale of any security or investment strategy. Merrill offers a broad range of brokerage, investment advisory (including financial planning) and other services. Additional information is available in our Client Relationship Summary (PDF).

What is market capitalization?

Market capitalization is a term used to describe the size of a company based on the total value of the company’s stock. Market capitalization is an important data point for making informed investment decisions, managing return expectations and building a well-balanced portfolio. Newer investors might mistakenly believe that stock price alone could be a good indicator of how large a company is, but what’s most important in determining a company’s size is the number of shares outstanding. Some may choose to stick with the big, stable, large-caps — especially if they want to preserve their capital or derive income from their investments.

Moreover, in some cases, stock prices can be manipulated through practices like “pump and dump,” which can distort a company’s true market capitalization. Large-cap companies typically have a market capitalization of $10 billion or more. They are usually industry leaders and have established a significant presence in the market. Registration granted by SEBI, membership of BASL (in case of IAs) and certification from NISM in no way guarantee performance of the intermediary or provide any assurance of returns to investors.

While understanding the impact of different factors on the MC, it is also advisable for investors to understand how investments grow or decline over the years. A company’s market cap is a single incontrovertible figure because it’s the number of outstanding shares multiplied by the price of a share. Market valuations can vary depending on the exact metrics and multiples that an analyst uses.


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