Market capitalization (sometimes known as “market cap” for short) helps investors to figure out how big a company is. It’s calculated by taking the price of one share and multiplying this by the number of outstanding shares. (Outstanding shares reflect how much stock is held on the open market.)
Let’s imagine a tech company called Mango has 15 million shares that are worth $150 apiece. Multiplying these two figures tells us that its market cap is $2.25 billion.
Why market caps are useful
Aside from sales figures, market caps offer investors an at-a-glance look at how big companies are compared with one another. They generally fall into three categories:
· Small cap: These companies tend to have a market cap of between $300 million and $2 billion. By and large, they are relatively new businesses – and as a result, they often carry risk for investors. Because they lack the financial resources of bigger players, small-cap companies often feel the effects of a recession more keenly. Increased competition in their sector can also have a big impact. Their market cap can fluctuate quite wildly, and although there is a chance that shares can grow substantially, success is not guaranteed
· Medium cap: The next level up is reserved for companies valued at between $2 billion and $10 billion. These businesses are usually fairly established and are continuing to chase growth by increasing their market share and innovating. While they may not offer the same potential for growth as their small-cap counterparts, they’ll often carry a lot less risk
· Large cap: With a market cap in excess of $10 billion, these are the heavyweights of the stock market – your Apples, Amazons, Facebooks and Alphabets among them. Many of the companies in this tier have international recognition and a reputation for paying profits to shareholders in the form of dividends on a regular basis. That said, lower risk can tend to mean lower returns, making these stocks quite a conservative bet for investors
How market caps fluctuate
A company’s market capitalization is not a fixed figure – and it can change with every trading session. Considerable movements in share prices (upwards or downwards) can have a big impact on its valuation. A market cap can also be affected whenever a corporation decides to issue new shares in an attempt to raise capital.
Some stock exchanges deploy what’s known as a market cap rule, ensuring that only companies of a certain size are listed. This means that a corporation needs to continually maintain its value for a set amount of time in order to remain eligible.