What is market capitalisation?

A headshot of Patrick Foot, financial writer for FOREX.com and CityIndex
By :  ,  Financial Writer

What does market cap mean?

Market cap means market capitalisation, a financial measure that’s derived by taking the total number of shares a company has available to trade (known as its outstanding shares) and multiplying it by the current price of those shares.

This gives you the total value of the stock, essentially telling you how much an entire company is worth on the markets. As a business’s share price goes up and down, so will its market cap, meaning that its monetary value is constantly in flux.

Apple’s market cap, for example, hit $3 trillion in early 2022 as investors continued to send its share price higher. But then general market fears and a tech sector slowdown saw its share price slump months later, affecting its total market value too.

Learn more about shares trading.

Market cap sizes

Stock investors tend to categorise listed companies by the size of their market capitalisation. Here are the three main sizes to look out for:

Small-cap stocks

These are companies worth $300 million to $2 billion. They could be relatively young or be in niche sectors or emerging industries, which means they’re often considered riskier as they lack the strength to cope with economic downturns. This makes small-cap stocks more volatile and means there can be lower trading volume and liquidity compared to larger companies. Despite the inherent risk, these firms can sometimes offer better growth opportunities.

Mid-cap stocks

These companies generally have a market cap of $2 billion to $10 billion. They’ve proven their credibility and operate in industries expected to grow. Analysts and investors expect mid-caps to be expanding. Because they have less of a track record, the risk is proportionately higher compared to large caps but lower than small caps. Many growth firms fit into the category of mid-caps, and that growth potential can be attractive to investors.

Large-cap stocks

These are companies that have a market capitalisation of $10 billion or more. Large caps, also known as blue-chip stocks, are established companies with long track records of success. The return on investment might not be as quick or spectacular as small or mid-cap growth stocks, but large caps often pay out dividends when possible, and the share price fluctuations are historically less volatile.

Coin market caps

So far in this article we’ve only covered stock market caps, but you’ll come across the term across other asset classes too. One such example is coin market caps (also known as crypto market caps), which measure the total value of a certain cryptocurrency currently in circulation.

Coin market caps are calculated in the exact same way as for stocks, except instead of using outstanding shares and share price, you use the total coins in circulation and the crypto’s current price.

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What is the market capitalisation formula?

The market capitalisation formula is:

Market capitalisation = current share price x number of outstanding shares

So, the only fundamental data you need to calculate a company’s total equity value is its share price and the number of shares currently available for trading.

How to calculate market cap

To calculate market cap, you simply multiply a company’s share price by its total outstanding shares. If a company has a share price of $40 and 1 billion shares available to trade, its market cap would be (40 x 1,000,000,000) $40 billion.

Or for a live example, say Amazon (AMZN) has 509 million shares outstanding, and the most recent closing price of its shares was $2,145. Amazon’s market capitalisation would be $1.09 trillion.

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What is market capitalisation used for?

There are lots of reasons to calculate a company’s market cap. Let’s take a look at three: measuring success, trading and indices.

Measuring success

Market cap offers a quick way to see how a stock is performing against its peers. If a company has a high market cap, it usually means that investors value it more than others in its sector.

After all, take a look at the list of the largest stocks by market cap and you’ll see some of the most successful companies on the planet.

However, you shouldn’t take capitalisation in isolation, as it only tells you the markets’ view of a company – ignoring key fundamentals such as revenue, profits and growth. Key financial ratios such as P/E (price to earnings) and P/B (price to book value) offer a much more holistic view of an equity.

Trading by market cap

Stock fundamental analysis involves identifying your fair value for a company and opening a position accordingly. Some traders use market cap instead of share price here, as it calculates the stock’s entire value instead of just the price of a single share.

One Amazon share is worth $2,000+, for example, whereas an Apple share is priced far lower. But Apple is the more valuable company.

Alternatively, you could build a strategy based around only investing in large, mid or small-cap companies, so you can target assets that fit your style and risk profile.

Market-cap weighted indices

Lots of stock indices – including the S&P 500 (US SP 500), FTSE 100 (UK 100) and the DAX 40(Germany 40) – use market capitalisation as part of their price calculations. Why? For the same reason we touch on above, because share prices alone can be skewed and not tell the whole story.

These indices are referred to as capitalisation-weighted, as opposed to price-weighted. They give more value to stocks with high market caps, ignoring share prices.

To continue our example above, a capitalisation-weighted index would give Apple a higher weighting than Amazon. A price-weighted index, on the other hand, would do the opposite. In fact, Amazon is not part of the price-weighted Dow Jones (Wall Street) partly as its high price would skew the calculation.

Largest companies by market cap

As of May 2022, thelargest companies in the world by market cap are as follows:

1

Saudi Aramco

$2.38 trillion

Saudi Arabia

2

Apple

$2.36 trillion

US

3

Microsoft

$1.94 trillion

US

4

Alphabet (Google)

$1.50 trillion

US

5

Amazon

$1.12 trillion

US

6

Tesla

$774.33 billion

US

7

Berkshire Hathaway

$678.41 billion

US

8

Meta (Facebook)

$559.52 billion

US

9

Johnson & Johnson

$461.62 billion

US

10

TSMC

$455.52 billion

Taiwan

 

Saudi Aramco market cap - $2.38 trillion

In May 2022, Saudi Aramco’s market capitalisation surpassed Apple’s, making it the most valuable company in the world. The switch was fuelled by rising commodity prices and an overall slide for US tech stocks.

Apple market cap - $2.36 trillion

Apple’s market cap briefly went above $3 trillion in January 2022, after it became the first $1 trillion company in 2018. However, today it is some way off those record highs – although still far ahead of the rest of the US tech majors.

Microsoft market cap - $1.94 trillion

Microsoft become the third company in the world to hit a value in excess of $2 trillion in June 2021, thanks partly due to the success of its Azure cloud computing service.

Alphabet market cap – $1.5 trillion

Alphabet, Google’s parent company, joined the trillion-dollar club at the beginning of 2020, and then exceeded $2 trillion at the end of 2021. Like other FAANG stocks, though, its share price has struggled in 2022.

Amazon market cap - $1.12 trillion

Amazon was the second of the FAAMG stocks to reach $1 trillion, just a couple of months after Apple in 2018. It hasn’t, however, managed to breach the $2 trillion mark since – peaking at $1.9 trillion in July 2021.

How can companies increase their market capitalisation?

There are two ways for companies to increase their market cap:

  1. Grow their share price. As we’ve seen, market caps are inherently tied to share prices. The higher the price, the higher the cap. So companies can increase their market capitalisations through the same methods as increasing their share prices: positive earnings, high dividends, strong management and growth
  2. Increase outstanding shares. The other way to grow market cap is to increase the number of shares you have available to trade. However, due to supply and demand increased availability of stock will typically see prices fall, so this is not a reliable method
Related tags: Equities Stocks

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