Market capitalization, frequently referred to as “market cap,” is the dollar amount ascribed to all of a company’s outstanding shares. The market cap is calculated by multiplying the number of shares outstanding by the current share price.
Let’s say a company as 25 million shares outstanding and the shares are selling for $20. You could find the market cap through the following equation. (25,000,000 x $20 per share = $500 million). Once the market cap is determined, it’s easy to determine the size of the company.
- Mega-cap- $100 billion-plus
- Large-cap- $10 billion–$100 billion
- Mid-cap- $1 billion–$10 billion
- Small-cap- $100 million–$1 billion
- Micro-cap- $10 million-$100 million
- Nano-cap- Less than $10 million
The market cap is often more telling than investigating total asset figures or looking only at sales. The size of a company can help an investor come to conclusions about the risk-return parameters and asset allocation.
Because of the nature of the stock market and the tendency of share prices to rise and fall, the market cap can be subject to change. It’s a market estimate of a company’s value, influenced heavily by current and future prospects, potential for mergers and acquisitions and the current state of the market or sector.