What is market capitalization?
Have you ever wanted to know the total amount of all the shares of stock a company owns? Market capitalization—or “market cap”—tells you exactly that. It’s one of the best ways to estimate a company’s financial value.
Calculating the market cap is simple. Just multiply a company’s number of outstanding shares by its share price. If a company has 20 million shares trading at $30, you multiply 20 million by 30, which equals $600M. That might seem like a lot, but it’s nothing in the grand scheme of things. Some of the world’s biggest companies have a market cap of $10 billion or more. (Did you know that Apple once had a market cap of $1T?) Successful startups in booming industries might have a market cap of $2B or more.
Why is market cap important? Ultimately, it helps you compare the success of one company to another. That can help you make smarter investment decisions. Market cap tells you the value of a company on the open market and its prospects. It influences what investors will pay for a company’s stock. Say you only have money to invest in company X or company Y. By working out the market cap of each company, you can learn how valuable the market perceives each of those companies to be.
Companies with large caps don’t always make the best investments, however. Sometimes a smaller company might have a lower cap, but it shows enormous growth potential.
Knowing a company’s market cap is just as useful as knowing its share price. However, this calculation is just an estimate of a company’s true value. It only reflects what the market thinks a company is worth. Plus, the market cap can fluctuate if a company’s share price changes.
Often, you don’t need to calculate a company’s market cap yourself. That’s because most financial websites list this information in a company’s profile.
Market capitalization case study
Someone wants to estimate the value of two separate companies before investing. She learns the market cap of company X is $1 and the market cap of company Y is $500M. That means the market perceives company X as more valuable than company Y.
The bottom line
Market capitalization is a calculation used to estimate the value of a company. You can use it to compare the worth of different companies when making investments. Calculating the market cap is simple. Just multiply a company’s number of outstanding shares by its share price.
Market caps worth $10 billion or more are known as “high caps”; those worth $2 billion or less are “low caps.” While market cap can be a valuable measure of performance, it only reflects what the market thinks a company is worth. Don’t forget, a market cap can change if a company’s share price changes.