Market capitalisation: everything you need to know
Market capitalisation, or market cap, is one of the easiest ways to determine the size of a company. Learn about the types of market cap, as well as the limitations of using it to decide which stocks to trade or invest in.
What is market capitalisation?
Market capitalisation is the total value of a company’s shares on the market. It is an easy way for traders and investors to make a decision about which stocks to choose, because it determines a company’s size and the risk involved in buying its shares.
Though it is a relatively simple way to determine risk, market cap is limited as a method of determining a business’s worth. Market capitalisation only reflects equity value (the value of shares) and not enterprise value (how much the business is worth after cash and debt have been accounted for). It also does not factor in important considerations such as dividends.
Market capitalisation calculation and example
Market capitalisation is calculated by multiplying the total number of a company’s outstanding shares by its current share price. For example, if Barclays has nine billion shares outstanding, each with a market value of £20, its market capitalisation would be £180 billion (9 billion x £20).
Types of market capitalisation
There are six main terms used to describe market capitalisation, categorised by company equity value. The cut-off values of each class might differ from country to country.
Companies that are larger by capitalisation tend to be lower risk options for traders and investors but may also offer slower growth. Those that have smaller market capitalisations, may offer higher risk but faster growth. However, which company performs better will depend on several micro- and macroeconomic factors.
Mega-cap companies have a market capitalisation of at least $200 billion. These corporations are considered the leaders in their respective industries, with a strong influence on competitors. These stocks can be found all over the world – even in emerging countries. Examples of mega-cap companies include tech giants Alphabet (Google), Alibaba, Apple, Microsoft and Amazon.
Large-cap companies (sometimes called big-cap) typically have a market capitalisation of $10 billion to $200 billion. A multitude of stocks fall in this range, especially in the US. Traders and investors sometimes like to add a few large cap stocks to their portfolio because these companies often have stable track records. Examples of large-cap companies include General Electric and IBM.
Mid-cap companies generally have a market capitalisation of $2 billion to $10 billion. These medium-sized companies are often considered to be on the road to becoming large-cap companies due to the number of high-potential growth stocks. Examples of mid-cap companies include Dollar Tree, Snap Inc. and Pets at Home.
Small-cap companies have a market cap between $300 million and $2 billion. Younger companies with promising potential make up the bulk of this level. One of the potential pros of a small cap stock is its growth potential, but these companies often come with higher risks, including less capital and lower liquidity. Examples of small-cap companies include Petra Diamonds, Countrywide and Capital & Regional.
Micro-cap companies have a market capitalisation of $50 million to $300 million. This capitalisation level consists mainly of penny stocks. Some traders and investors believe that these companies have the most potential, as they might still be in the early phases of growth. However, they could also be more volatile than mid-cap or large-cap companies. Examples of micro-cap companies include Infinity Pharmaceuticals, Aqua Metals and 22nd Century Group.
Nano-cap companies have a market capitalisation of less than $50 million. These stocks are notoriously risky, because a small number of investors can still have a big impact on the price of the shares. Examples of nano-cap companies include Oramed Pharmaceuticals, Urban Tea and Eastside Distilling.
Why is market capitalisation important for traders?
Market capitalisation is important for traders because it provides a starting point in determining the size of a company and its value in the greater market place. It can also be helpful in establishing the risk involved in buying stocks since the smaller companies often face more challenges than larger organisations.
Market capitalisation summed up
- Market capitalisation is the total value of a company’s shares on the market
- It is calculated by multiplying the total number of a company’s outstanding shares by its current share price
- Market capitalisation is important for traders because it provides a starting point in determining the size of a company and its value in the greater market place
- There are six key terms used to describe market capitalisation: mega-cap, large-cap, mid-cap, small-cap, micro-cap and nano-cap
- Companies that are larger by capitalisation tend to offer lower risk and slower growth
- Companies that have smaller market capitalisations may offer higher risk but faster growth
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