You may have heard about the market cap before, but what is the meaning of market cap? Read on to discover all about the term market cap.
If you’re an investor, a business owner, or simply enjoy spending your days on Wall Street, you likely know all there is to know about market capitalization (or market cap, for short). For the rest of you who may not have the slightest clue what we’re talking about — this article is for you.
In this post, we’re exploring market capitalization to uncover what it means, why it’s important, and more. So, if you’re drawing blanks when someone says the word “market cap,” then keep reading — here’s our complete guide on market capitalization.
What Is the Definition of Market Capitalization?
Market capitalization is the current market value of a publicly-traded company’s outstanding shares (all shares that can be sold or purchased by the public). Through market cap, investors can evaluate a company’s worth and is the key factor in stock valuation.
Simply multiply the number of outstanding shares by the share price, and you can determine a company’s market cap.
For example, let’s say our company has a share price of $43 with currently 2.5 million shares outstanding; our current market cap would be $107.5 million (2.5 million multiplied by $43).
A company’s market cap changes daily because its stock price does, but that is not the only time market cap changes. When a company changes the number of its outstanding shares, it also changes its market cap. Companies commonly do this to buy back shares or raise capital.
What Are the Various Market Capitalization Categories?
More often than not, companies are sorted based on their market cap. These various categories (based literally on dollar size) help all types of investors make better-informed decisions.
Below we have compiled a list of the different market cap categories:
- Nano Cap — Nano-cap companies with market caps below $50 million are typically traded on the OTCBB (Over The Counter Bulletin Board) or pink sheet.
- Micro-Cap — Micro-cap companies (primarily penny stocks) have a market cap between $300 million and $50 million.
- Small-Cap — The bread and butter of small-cap companies consist primarily of young companies but when an older, established business losses value it too can fall into this $2billion to $300 million market capitalization category.
- Mid Cap — Designates a company with a market cap between $2 and $10 billion.
- Large Cap — A company with a market cap value of more than $10 billion (AKA “big cap”).
- Mega Cap — In this bracket, all companies have a market cap of $200 billion or higher.
Is There a Better Market Cap Category?
It may seem like the safe bet to say that the larger market cap bracket is the best bet. However, while it may be the safer category, it’s not always the “best”. It is true that with a larger company you come with some slight advantages.
Widespread brand recognition and arguably better financing, just to name a few; however, those are what factor into a larger company being a safer market cap, not better.
As a smaller company, you have a wider range of opportunities and much more room for growth, whereas a larger company may be starting to see their growth rates do the opposite as time goes on.
Large and mega-cap companies are generally considered to have less volatility, with small-cap and mid-cap companies offering that high return potential; the choice is up to the investor. Basically, there is no “better,” as beauty is in the eye of the beholder…or the risk-taker, in this case. What do you think your investment strategy would be?
Other Investment Terms to Know
Before we bring this article to an end, we want to leave you with some homework to help further your overall understanding of market capitalization.
Below, you’ll find a list of investment terms that are commonly associated with our word of the day:
- Mutual funds
- RIA (Registered Investment Advisor)
- Balance sheet
- Asset allocation
- Expense ratio
- Stock exchange
- ETF (exchange-traded fund)
- Individual retirement account (IRA)
- Taxable accounts
- Bear market
- Blue chip
- Open market
- Enterprise value
- Stock split
- NASDAQ (National Association of Securities Dealers Automated Quotations)
- Tax-advantaged accounts
- S&P 500
- Bond fund
Research each word and study the definitions. This independent practice will expand your knowledge of market capitalization as well as your English vocabulary.
In short, with the help of market cap, investors can better determine the right stocks to invest their hard-earned capital in — not only for their risk tolerance but for their investment goals as well.
In layman’s terms: share price x shares outstanding = market capitalization.