What is Market Capitalization: A Building Block for Investing
Market capitalization, or market cap, is a metric used by investors to compare the size and value of different companies. It refers to the total value of all of a company's shares of stock, calculated by multiplying the share price by the number of shares outstanding. Understanding market cap is key for stock valuation and identifying the size of a company compared to its peers in the same industry or market.
How to Calculate Market Cap
Market capitalization is a simple calculation that allows investors to measure the total market value of a company's outstanding shares. It is calculated by multiplying the current stock price per share by the total number of shares outstanding.
For example, if a company has 1 million shares outstanding and its share price is $50, its market cap would be $50 million ($50 x 1 million shares).
Similarly, if a company has 5 million shares outstanding at a price of $10 per share, its market capitalization would be $50 million.
Why is Market Cap Important?
Market capitalization is a key metric for investors because it provides a way to evaluate and compare the relative size and value of different companies. The market cap of a company reflects the cumulative valuation of all its outstanding shares. Larger market caps tend to indicate established, less volatile companies while small market caps represent newly emerging players with potential for rapid expansion.
By considering factors like market capitalization, valuation ratios, and growth rates, investors can gain insight into the potential risk-return profile of a company’s stock to make informed investment decisions when constructing a diversified portfolio.
If you want to know the market capitalization (market cap) of a specific company, you can visit Moomoo's stock market page and check the market capitalization as well as the financial performance data of all listed companies.
Market Cap Categories
Market cap can give a sense of a company's worth and growth potential. Investors use it to categorize companies into large-cap, mid-cap, and small-cap for portfolio construction based on risk tolerance.
● Large-cap: Market cap over $10 billion. These are generally dominant, well-established companies with widespread brand recognition. They usually offer stability but low growth potential.
● Mid-cap: Market cap between $2 billion to $10 billion. These are growing companies gaining market share in their industries. They may offer moderate growth potential and risk.
● Small-cap: Market cap between $300 million to $2 billion. These are usually new companies serving niche markets. They can offer high growth potential but also high risk.
How Do Stock Events Impact a Company’s Market Cap?
Stock price - Rising and falling stock prices directly impact market cap.
Shares outstanding - Events like new share issuances or exercise of warrants increase shares outstanding, diluting market cap.
Stock splits/dividends - These events alter share price or shares outstanding but do not actually change market cap.
Is a Higher Market Cap Better?
Large-cap companies, with market capitalizations of $10 billion or more, are typically viewed as more conservative investments compared to small-cap and mid-cap stocks. The rationale is that large-cap companies pose less risk, but offer less aggressive growth potential. Their substantial market valuation implies these large firms likely have significant capital available to invest in future expansion and innovation. However, a century-old company with a large market cap may not necessarily be a completely low-risk investment, as market cap is only the first step in understanding and researching the company.
Additionally, the prominence of large market cap companies attracts greater analyst and media coverage. Their size and stability also equates to an enhanced ability to access credit and loans to fund growth initiatives. However, the trade-off is that massive large-cap companies have less overall room for expansion than their small-cap counterparts. While large-cap stocks are lower risk, investors seeking rapid growth may look to smaller market cap stocks with more upside potential.
Difference Between Market Cap and Free-float Market Cap
Market capitalization (market cap) is calculated by multiplying a company's total outstanding shares by the current market price per share. This gives the total market value of the company's equity.
Free-float market capitalization only counts shares that are freely traded on public exchanges, excluding locked-up shares held by insiders like executives and large shareholders. To calculate free-float market cap, subtract the number of locked-up shares from total shares outstanding, then multiply the remaining shares by the current share price. Free-float market cap gives a more accurate picture of the value available for public trading. For example, a company with 1 million total shares outstanding but 500,000 locked-up insider shares would have a market cap of $10 million if shares trade at $10. But the free-float market cap would only be $5 million based on the 500,000 freely tradable shares.
