What Is Market Cap and Why Is It Important?
Listen, if you’re gonna trade the stock market you gotta do your research. In fact, knowing certain facts about a company can help you choose the right stocks to watch.
It’s also smart info to know when it comes to making solid trade plans.
One thing you want to research about a company is its size. The simplest way to do this is by looking at its market cap…
But what exactly is a market cap and how do you use it in your research?
I’m glad you asked. Today, we’ll dig in and spend some time answering those questions.
Table of Contents
What Is a Market Cap?
A market cap — short for market capitalization — is the total market value of a company represented in a dollar amount.
Traders and investors often use this metric to size up corporations. And there’s a bonus: it’s super easy to calculate. All you have to do is multiply a stock’s current market price by the total number of outstanding shares of the company.
There are different categories for market cap, and each is based on size.
Let’s take a look at the three main categories…
The Three Main Market Cap Categories
The market generally classifies stocks into three groups: large-cap, mid-cap, and small-cap. Let’s take a closer look at each.
Large-Cap
Large-cap stocks have a market cap of $10 billion and over. Some of the best-known companies in the world, such as GE and Tesla, are in this category.
Large-caps generally have well-developed business models and generate significant revenue. These stocks are more stable, secure than small- and mid-cap companies. Long-term investors tend to gravitate to these stocks for their potential long-term value and gains.
Mid-Cap
Mid-cap stocks have a market cap between $2 billion and $10 billion. Compared to large-caps, they tend to be growth stocks. They could potentially return stronger gains in a shorter time frame…
But mid-caps aren’t as stable as large-caps. They also face the difficult task of competing with and catching up with larger rivals in their industries.
Small-Cap
These stocks have a market cap between $300 million to $2 billion. These tend to be newer companies. And a lot of them go public in an effort to raise capital quickly. That’s not always a good sign.
A lot of these companies struggle. And because they have a shorter track record, you can’t always find lengthy financial history to analyze.
You might think you should avoid these at all costs, right? Not so fast. A lot of traders hone in on small-cap stocks. Yeah, they’re risky, but they can also have a high potential for growth and volatility.
Market Cap vs. Market Value
This is an important distinction … Don’t mistake market cap for another measure, the market value.
(Need to brush up on your market vocab? Check out this post.)
You can use both to measure a company’s standing, but they have very different calculations.
A market cap reflects a company’s equity value only … but it doesn’t necessarily reflect its true market value.
Remember how I said that you calculate the market cap by using a stock’s current market price and the number of outstanding shares?
Well, market value calculations are much more complex. They include many metrics such as price-to-earnings, price-to-sales, stockholder’s equity, and return-on-equity.
That’s a subject for another, though. Let’s get back to market cap and look at a few examples…
Market Cap Examples
You can look up a stock’s market cap by searching for that information on different financial websites…
Or you can easily look it up right from the StocksToTrade platform. Key company information is all in one place to help you speed up your research.
Under the Key Statistics tab, you’ll find the market cap information. Let’s take a look at an example for each category size.
One of the hottest large-cap stocks right now is Tesla Inc. (NASDAQ: TSLA). On February 6, the share price was $727.40. It has 180.24 million outstanding shares and its market cap is $131.11 billion.
Tesla Inc. (NASDAQ: TSLA) Key Statistics (Source: StocksToTrade)
For a mid-cap example, let’s look at a weed stock. Canopy Growth Corporation (NYSE: CGC). is a Canadian company that cultivates and sells medicinal and recreational cannabis.
On February 6, the share price was $21.57. With 349.36 million outstanding shares, the market cap is $7.54 billion.
Canopy Growth Corporation (NYSE: CGC) Key Statistics (Source: StocksToTrade)
For a small-cap example, we have Skyline Champion Corporation (NYSE: SKY). This company is based in Indiana. It operates as a producer of factory-built housing in the U.S. and Canada. As of February 6, the share price is $29.09. With 56.67 million outstanding shares, its market cap is $1.65 billion.
Skyline Champion Corporation (NYSE: SKY) Key Statistics (Source: StocksToTrade)
Why Is Market Cap Important?
A stock’s market cap matters when you’re doing stock research. Why? It speaks to which stage a company is in its business development.
This information can help you determine if a stock has the potential to fit certain setups … and it can also help you gauge risk vs. reward.
I’ll explain that further in a bit.
How Does Market Cap Affect Stock Price?
Large-cap stocks tend to be more conservative than the smaller ones. These companies have strong brands with a number of resources to help keep them stable. These companies might also be market or sector leaders.
They generally have less drastic stock price drops … but also less aggressive price increases. Some traders find these types of stocks slow and boring.
Mid-cap companies are more developed than small-cap companies. These companies are at a stage where they’re looking to increase market share and boost their competitive edge. On the risk/reward spectrum, they fall between large and small caps.
Small-cap companies have very limited resources compared to mid- and large-caps. This can make them vulnerable to both economic downturns and the uncertainties that come along with doing business. That means way more risk for traders and investors…
But there’s that volatility that day traders love. Small-caps can offer aggressive growth potential with very volatile stock price movements. But you gotta be savvy and know how to play them…
That’s exactly what we focus on in StocksToTrade Pro. That’s our mentorship community. I lead two webinars every day, plus share my screens and thoughts on the market. You can also access tons of educational videos and network with traders who are learning the markets just like you. Join us today!
What Factors Affect the Market Cap?
Like I said before, the market cap is a product of both the current price of a stock and the outstanding shares of the company. So anything that affects either of these things can impact the market cap.
The following factors can affect a stock’s price:
- Supply and demand for the stock
- The company’s fundamental strength
- News that affects the specific company, its sector or the overall market
- Competitor performance
- Politics, new laws or regulations, global events
The number of outstanding shares can be affected by the following:
- The company issues new shares
- The company buys back some of its shares
Now let’s take a look at the calculations…
How Does a Market Cap Calculator Work?
The formula for calculating market cap is as follows:
(Current Stock Price) x (Outstanding Shares of a Company) = Market Cap
If Company XYZ has three million outstanding shares and a current stock price of $2.00, the market cap would be $6 million…
($2.00) x (3 million shares) = $6 million
Let’s look at a real-world example.
ServiceNow, Inc. (NYSE: NOW) is a California-based company that provides enterprise cloud computing solutions for business worldwide.
According to its last form 10-Q, it has 188.6 million total outstanding shares. The stock price is $338.50 as of this writing.
Using the formula, the market cap for ServiceNow is $63,841,100,000 — that makes it a large-cap stock.
($338.50) x (188.6 million) = $63,841,100,000
Pros and Cons of Using Market Cap
Market cap isn’t the only way to measure the value of a company … and there are both pros and cons to it. Let’s take a look at a few…
- The formula is simple and easy.
- It’s a way to determine a company’s size.
- You can use it to understand a company’s development stage.
- There are more complex ways to get a more accurate value of a company.
Conclusion
Now you know what market cap is and how to use it.
Remember, this is just a piece of the puzzle. There are a lot of other things you should research when it comes to trading opportunities. The smartest traders remember to look at the big picture … That can help them make better trading decisions.
Market cap is a great tool to determine a company’s size and developmental stage. But there’s so much more to trading.
If you want to hear me talk about how market cap fits into my trader checklist, listen to this SteadyTrade podcast episode. I talk about the advantages of small versus large market caps.
Also, if you haven’t subscribed to my SteadyTrade updates, do it right here!
If you want to hear more about what to research before entering a trade, comment below!
One Platform. One System. Every Tool
Interested in trying the number 1 trading platform? Get started risk free.
Patterns are just one variable to consider before entering a trade. Before you jump into a trade based solely on.
market cap
market cap — market capitalization UK [ˌmɑː(r)kɪt ˌkæpɪt(ə)laɪˈzeɪʃ(ə)n] / US [ˌmɑrkət ˌkæpɪt(ə)laɪˈzeɪʃ(ə)n] or market cap UK / US noun [countable/uncountable] Word forms market capitalization : singular market capitalization plural market capitalizations… … English dictionary
market cap — UK US noun [C or U] FINANCE, STOCK MARKET ► MARKET CAPITALIZATION(Cf. ↑market capitalization) … Financial and business terms
market cap — variant UK US Main entry: market capitalization … Useful english dictionary
Market Cap — Die Marktkapitalisierung (englisch: market cap) auch Börsenkapitalisierung oder Börsenwert genannt einer Aktiengesellschaft ergibt sich aus der Multiplikation von Aktienkurs und der gesamten Anzahl der ausgegebenen Aktien des Unternehmens.… … Deutsch Wikipedia
Market capitalization — (often market cap) is a measurement of the value of the ownership interest that shareholders hold in a business enterprise. It is equal to the share price times the number of shares outstanding (shares that have been authorized, issued, and… … Wikipedia
market capitalization — UK [ˌmɑː(r)kɪt ˌkæpɪt(ə)laɪˈzeɪʃ(ə)n] / US [ˌmɑrkət ˌkæpɪt(ə)laɪˈzeɪʃ(ə)n] or market cap UK / US noun [countable/uncountable] Word forms market capitalization : singular market capitalization plural market capitalizations Word forms market cap :… … English dictionary
median market cap — The midpoint of market capitalization ( market price multiplied by the number of shares outstanding) of the stocks in a portfolio. Half the stocks in the portfolio will have higher market capitalizations; half will have lower. Bloomberg Financial … Financial and business terms
market capitalization — market ,capitali zation or ,market cap noun count or uncount BUSINESS a way of measuring the value of a company calculated by multiplying the number of the company s shares by their price on the STOCK MARKET … Usage of the words and phrases in modern English
Market Capitalization — The total dollar market value of all of a company s outstanding shares. Market capitalization is calculated by multiplying a company s shares outstanding by the current market price of one share. The investment community uses this figure to… … Investment dictionary
market capitalization — noun an estimation of the value of a business that is obtained by multiplying the number of shares outstanding by the current price of a share • Syn: ↑market capitalisation • Hypernyms: ↑capitalization, ↑capitalisation * * * market capitalization … Useful english dictionary
cap — An upper limit for a variable, such as the upper limit on the interest rate paid or received in a transaction. For example, an adjustable rate mortgage may have a cap of 10 percent. In this case, the rate can adjust however the loan terms provide … Financial and business terms
Understanding market capitalization
Market cap—or capitalization—refers to the total value of all a company’s shares of stock. Knowing a company’s market cap can help you compare the relative size of one company versus another.
If you’re creating an investment strategy designed to help you pursue long-term financial goals, understanding the relationship between company size, return potential, and risk is crucial. With that knowledge, you’ll be better prepared to build a balanced stock portfolio that comprises a mix of «market caps.»
Market cap—or market capitalization—refers to the total value of all a company’s shares of stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares. For example, a company with 20 million shares selling at $50 a share would have a market cap of $1 billion.
Why is market capitalization such an important concept? It allows investors to understand the relative size of one company versus another. Market cap measures what a company is worth on the open market, as well as the market’s perception of its future prospects, because it reflects what investors are willing to pay for its stock.
- Large-cap companies are typically firms with a market value of $10 billion or more. Large-cap firms often have a reputation for producing quality goods and services, a history of consistent dividend payments, and steady growth. They are often dominant players within established industries, and their brand names may be familiar to a national consumer audience. As a result, investments in large-cap stocks may be considered more conservative than investments in small-cap or mid-cap stocks, potentially posing less risk in exchange for less aggressive growth potential.
- Mid-cap companies are typically businesses with a market value between $2 billion and $10 billion. Typically, these are established companies in industries experiencing or expected to experience rapid growth. These medium-sized companies may be in the process of increasing market share and improving overall competitiveness. This stage of growth is likely to determine whether a company eventually lives up to its full potential. Mid-cap stocks generally fall between large caps and small caps on the risk/return spectrum. Mid-caps may offer more growth potential than large caps, and possibly less risk than small caps.
- Small-cap companies are typically those with a market value of $300 million to $2 billion. Generally, these are young companies that serve niche markets or emerging industries. Small caps are considered the most aggressive and risky of the 3 categories. The relatively limited resources of small companies can potentially make them more susceptible to a business or economic downturn. They may also be vulnerable to the intense competition and uncertainties characteristic of untried, burgeoning markets. On the other hand, small-cap stocks may offer significant growth potential to long-term investors who can tolerate volatile stock price swings in the short term.
Market cap vs. free-float market cap
Market cap is based on the total value of all a company’s shares of stock. Float is the number of outstanding shares for trading by the general public. The free-float method of calculating market cap excludes locked-in shares, such as those held by company executives and governments. Free-float methodology has been adopted by most of the world’s major indexes, including the Dow Jones Industrial Average and the S&P 500.
What could impact a company’s market cap?
There are several factors that could impact a company’s market cap. Significant changes in the value of the shares—either up or down—could impact it, as could changes in the number of shares issued. Any exercise of warrants on a company’s stock will increase the number of outstanding shares, thereby diluting its existing value. As the exercise of the warrants is typically done below the market price of the shares, it could potentially impact the company’s market cap.
But market cap typically is not altered as the result of a stock split or a dividend. After a split, the stock price will be reduced since the number of shares outstanding has increased. For example, in a 2-for-1 split, the share price will be halved. Although the number of outstanding shares and the stock price change, a company’s market cap remains constant. The same applies for a dividend. If a company issues a dividend—thus increasing the number of shares held—its price usually drops.
To build a portfolio with a proper mix of small-cap, mid-cap, and large-cap stocks, you’ll need to evaluate your financial goals, risk tolerance, and time horizon. A diversified portfolio that contains a variety of market caps may help reduce investment risk in any one area and support the pursuit of your long-term financial goals.
Market capitalization
Market capitalization или рыночная капитализация. Нужна для того, чтобы провести оценку величины компании. Фактически это ее стоимость, основой для расчета которой является текущая рыночная цена.
Виды рыночной капитализации:
— ценной бумаги – как правило, это ее котировка на бирже;
— фондового рынка – состоит из рыночной стоимости всех ценных бумаг, которые
обращаются на данном рынке;
— акционерного общества показатель, оценивающий суммарную стоимость всех акций компании.
Особенности и формула расчета
Рассчитать объем рыночной капитализации компании можно, умножив количество всех выпущенных ею акций на их рыночную стоимость.
Стоит помнить, что показатель рыночной капитализации вовсе не обязательно будет давать исчерпывающую и объективную информацию о том, насколько успешны дела компании. Потому как сама цена акций находится в зависимости от различных спекуляций, а также от ожиданий рынка. В качестве примера можно привести 90е годы и бум «доткомов». На тот момент ожидания рынка были сильно завышены, и рыночная капитализация фирм с Интернетнаправленностью превышала миллиарды долларов, но при этом прибыли многие из этих компаний не приносили и даже ничего не реализовывали.
Поэтому рыночную капитализацию уместнее всего будет назвать такой стоимостью
компании, в которую ее оценивает рынок, исходя из результатов недавних сделок.