What Is Market Capitalization?

In the investing world, you’ll see various numbers and metrics used to track the performance and risk of a stock. In particular, you might notice that a stock or market index gained or lost several percentage points on a given day. This refers to a crucial metric called market capitalization.

Investors use market capitalization as a means to track the market value of a company. Doing so allows them to understand a firm’s stock more clearly and make an informed decision on whether they should add any shares to their portfolio. In this article, we’ll help you understand what market cap means and how to calculate it. We’ll also expand upon why it’s such an important metric and how investors use it.

Understanding Market Capitalization

Market capitalization, otherwise known as market cap, is a number that signifies the total dollar value of a public company’s outstanding common shares. In simpler terms, it represents the “total value investors are putting on a company,” according to Robert R. Johnson, PhD, CFA, CAIA, Professor of Finance, Heider College of Business, Creighton University. To calculate it, you must take the total outstanding common shares and multiply it by the current stock price.

As an example of the formula in action, consider a company with 1 million available shares of common stock trading at $35 per share. In this instance, the company’s market cap would be $35,000,000.

Because market capitalization is heavily influenced by a company’s share price, many factors can impact it. For example, the release of a new product or a milestone in sales/revenue could cause the price to increase. However, negative events, such as a scandal, financial issue, or layoffs could decrease a firm’s price. Be aware that a stock split, where the firm splits the number of outstanding shares and reduces the share price, won’t impact market cap.

Why Market Cap Is an Important Metric

Market cap is an important metric for both investors and those in the finance industry to pay attention to. It serves as an indicator of a company’s success and overall performance. Additionally, it helps one assess where a business is positioned relative to others.

Johnson explains that market cap “gives investors a rough approximation of where a company is in terms of its development process.” Part of this process is categorizing businesses into market cap segments. For example, “mega- and large-cap stocks, for the most part, tend to be more mature and stable companies than mid-cap, small-cap and micro-cap stocks,” adds Johnson. Investors use these buckets to assess and manage risk as they add stocks to their portfolios.

More simply, market cap is a useful way to value a company. This gives investors a quick and easy indicator of a firm’s success, performance, or position in the market. However, while this is true, it’s not necessarily the one-and-only metric that investors base their decisions on.

Market Cap Segments

As Johnson describes above, investors use market cap to place companies in a variety of segments. These categories indicate how large a company is, its performance, and volatility as a result of its positioning. By doing so, investors can more easily know what to expect when they buy shares of a given company, including its potential for both risk and reward.

Below are the most common market cap segments investors use:

Mega-Cap

Companies in the mega-cap segment have a market cap of $200 billion or more. This represents a small group of businesses that reside on the highest end of the spectrum. These stocks are typically traded on the NASDAQ Capital Market or the American Stock Exchange. Prominent examples include (numbers are as of 2023):

• Apple Inc. – $2.79 trillion
• Amazon.com, Inc. – $1.25 trillion
• Microsoft Corporation – $2.46 trillion
• Visa Inc. – $499 billion
• Walmart Inc. – $423 billion

Large-Cap

Large-cap companies are those with a market cap of $10 billion to $200 billion. They are some of the largest publicly traded firms in the world. Like with mega-cap organizations, stocks in this segment tend to have lower volatility, while also commonly paying dividends. Notable examples include:

• Cisco Systems – $190.89 billion
• The Walt Disney Company – $186.31 billion
• McDonald’s Corporation – $185.57 billion
• Ford Motor Company – $47.41 billion
• The Allstate Corporation – $42.55 billion

Mid-Cap

Companies with a market cap of $2 billion to $10 billion fall within the mid-cap segment. While some of these firms may be more mature, many tend to have a higher level of risk and volatility as compared to their large- and mega-cap counterparts. Common examples include:

• Coca-Cola Consolidated, Inc – $9.87 billion
• Levi Strauss & Co. – $9.18 billion
• Hasbro, Inc. – $8.27 billion
• Macy’s, Inc. – $5.38 billion
• Nordstrom, Inc. – $3.45 billion

Small-Cap

Small-cap companies are those with a market cap between $250 million and $2 billion. Unlike mid- or large-cap organizations, these tend to be more volatile and carry a higher risk level. However, because they’re typically newer companies, investors may gravitate toward these stocks due to their high growth potential. Common examples include:

• Lions Gate Entertainment Corp. – $1.99 billion
• JetBlue Airways Corporation – $1.95 billion
• Chipotle Mexican Grill, Inc. – $1.80 billion
• Lemonade. Inc. – $1.15 billion
• Jack in the Box Inc. – $982.69 billion

Micro-Cap

Micro-cap companies represent the other end of the spectrum, with a market cap below $250 million. These are the youngest public companies, carrying both a high level of risk and growth potential with them. Below are five notable examples:

• iRobot Corporation – $243 million
• HomeStreet, Inc. – $204.32 million
• RE/MAX Holdings, Inc. – $153.37 million
• iHeartMedia, Inc. – $129.62 million
• BuzzFeed Media, Inc – $110.13 million

How Investors Use Market Cap

Market cap is often a consideration for the savvy investor. This is because, as mentioned, it gives one a way to easily and quickly evaluate a company’s market position, performance, and propensity for risk. By using this metric, an investor can more easily choose whether or not to add a stock to their portfolio.

Per Johnson, it’s common for investors to “want to diversify across market capitalization segments.” This is because, typically, “small-cap stocks have experienced higher returns,” yet are “more volatile than large-cap stocks.” Johnson shares that data collected by Duff & Phelps from 1926 through 2022 indicates that large-cap stocks “have had a mean annual return of 10.1% with a standard deviation of annual returns of 19.8%,” while small-cap stocks “have had a mean annual return of 11.8% with a much larger standard deviation, at 31.2%” He explains that, while “a difference of 11.85 and 10.1% may not seem substantial, if one had invested one dollar in the small-cap index at year-end 1926, one would have $49,052 at the end of 2022. That same dollar invested in the large-cap index would have grown to $11,535.”

In simple terms, market cap helps inform decisions investors make regarding their asset allocation, or how they structure their portfolio. We recommend working with an investment manager before investing, however. This will ensure you avoid mistakes and make the right decisions for your goals.

To find a high-quality advisor, consider using a free matching tool, such as this one. After filling out a short quiz regarding your goals and current finances, it’ll present you with up to three vetted options.

Frequently Asked Questions

Is it good for a company to have a high market cap?

When a company has a high market cap, this typically means it’s a mature, established organization with less risk. However, less risk also poses a smaller potential for significant returns. Ultimately, it’ll be up to you, with the help of a financial advisor, to determine whether a company with a higher or lower market cap better fits your portfolio.

How do I find a company’s market cap?

To calculate a company’s market cap, you must take the number of outstanding common shares and multiply it by the stock price. A company’s current share price can be found on many financial trackers, as well as online brokerage platforms, such as Fidelity or Vanguard. The outstanding shares an organization has can be found on its balance sheet listed as “Capital Stock.”

Is market cap the same as valuation?

Market cap is one way in which investors place value on a company. Valuation, on the other hand, is a more general term, which can refer to the former, as well as other methods, such as equity value.

Does a stock split impact a company’s market cap?

A stock split won’t affect a company’s market cap. This is because the outstanding number of shares is divided proportionately with the change in the stock price.