What is Market Capitalization?

Investors often want to compare similarly sized companies when making an investment decision. But how do you measure the size of a company?

There are a number of ways to measure a company’s size.  But one of the most common ways is to look at its Market Capitalization or Market Cap.

Market cap is the market value of a company.  In other words it tells you how much it would cost to buy every public share of a company at its current share price.

You need to know two things about a company’s stock to calculate its market cap.  The first is the Share Price of the stock.  The share price is the price where one share of stock trades between buyers and sellers in the public market.  The second thing you need to know is the number of Outstanding Shares.  Outstanding shares is the total number of public shares of the company owned by investors and employees.

To calculate market cap, you multiply the share price by the number of outstanding shares.  And the bigger the market cap, the bigger the size of the company.

Companies are generally placed into one of three categories based on the size of their market cap.  There isn’t a rule that defines the size requirements for each category, but generally a Small Cap company has a market cap of less than $2 billion.  A Mid Cap company has a market cap between $2 billion and $10 billion.  And a Large Cap company has a market cap of over $10 billion.

Investors can now use these categories to compare companies of similar size.  They can also use these categories to create investment portfolios with either similarly sized companies or a diversified portfolio with different sized companies.

Remember, market cap is one way to measure the size of a company.  And it can help investors categories companies by size for easier comparison.

 

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