Starting out
Market capitalisation
Also called Market cap
What the market says a whole company is worth: the share price multiplied by the number of shares.
How it works
Market cap is the correct way to compare company sizes, and share price alone is not. It is also how most indices decide how much of each company to hold, which is why the largest companies dominate index returns.
Companies are loosely grouped by size — large-cap, mid-cap, small-cap and micro-cap — with the boundaries varying by market. The groups behave differently: smaller companies are typically more volatile, less liquid and less covered by analysts.
Where it misleads people
Market cap ignores debt. Two companies with the same market cap can be worth very different amounts as businesses if one is financed with borrowed money. Enterprise value is the figure that accounts for this.
Formula
Market capitalisation = share price × shares outstandingWorked example
A company with 500 million shares trading at $40 has a market cap of $20 billion.
Related terms
- Enterprise valueWhat it would cost to buy the whole business: market value plus debt, minus cash.
- Shares outstandingThe total number of a company’s shares currently held by all its investors.
- Free floatThe portion of a company’s shares that is actually available to trade in the market.
- Small-cap, mid-cap and large-capRough size bands used to group companies by market capitalisation.
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Educational reference only. Nothing here is investment advice or a recommendation to buy or sell anything, and tax treatment depends on your own circumstances and the country you are in.