Market capitalization (market cap) is the total market value of a company’s outstanding shares. It’s the primary measure of company size in investing and forms the basis of major stock indices.
Beginner
What It Means
Market cap tells you what the market thinks a company is worth. It’s calculated by multiplying the stock price by the total number of shares outstanding.
Market Cap = Share Price × Shares Outstanding
Example
| Company | Share Price | Shares Outstanding | Market Cap |
|---|
| Company A | $50 | 2 million | $100 million |
| Company B | $200 | 500,000 | $100 million |
Size Categories
| Category | Market Cap Range | Examples |
|---|
| Mega-Cap | >$200 billion | Apple, Microsoft, Amazon |
| Large-Cap | $10B - $200B | Most S&P 500 companies |
| Mid-Cap | $2B - $10B | Regional leaders |
| Small-Cap | $300M - $2B | Growing companies |
| Micro-Cap | Less than $300 million | Very small public companies |
Why It Matters
Market cap determines:
- Which indices include a stock (S&P 500, Russell 2000, etc.)
- How much of an index a stock represents
- Liquidity and trading characteristics
- Risk and return expectations
Advanced
Market Cap vs. Other Size Measures
| Measure | Definition | Use Case |
|---|
| Market Cap | Price × Shares | Most common size measure |
| Enterprise Value | Market Cap + Debt - Cash | Acquisition value, better for comparisons |
| Revenue | Annual sales | Size of operations |
| Total Assets | Balance sheet assets | For financials, regulated industries |
Float-Adjusted Market Cap
Most indices use float-adjusted market cap:
Float-Adjusted Market Cap = Price × Float Shares
Float Shares = Total Shares - Insider Holdings - Restricted Shares
- Insider holdings (executives, founders)
- Government holdings
- Strategic holdings by other companies
- Restricted stock
Index Weighting
Market cap determines portfolio weights in cap-weighted indices:
S&P 500 Example (simplified):
- Apple: $3T market cap → ~7% of index
- Small company: $50B market cap → ~0.1% of index
Cap-weighted indices are “self-rebalancing” - as stocks rise, their weight naturally increases. No trading required to maintain weights.
The Size Factor
Academic research documents the “size premium” - historically, smaller companies have outperformed larger ones:
| Period | Small-Cap Premium |
|---|
| 1926-2023 | ~2-3% annually |
| 1980-2000 | Significant |
| 2000-2020 | Near zero or negative |
The size premium has been inconsistent in recent decades. Small-cap outperformance is not guaranteed and comes with higher volatility.
Market Cap Characteristics by Size
| Characteristic | Large-Cap | Small-Cap |
|---|
| Volatility | Lower | Higher |
| Liquidity | High | Lower |
| Analyst Coverage | Extensive | Limited |
| Information Efficiency | High | Lower |
| Trading Costs | Low | Higher |
Dynamic Nature
Market cap changes continuously:
- Stock price movements
- Share buybacks (reduces shares, may increase price)
- Stock issuance (increases shares, may decrease price)
- Stock splits (no effect on market cap)
Sector Distribution by Size
Different sectors dominate different size segments:
| Segment | Dominant Sectors |
|---|
| Mega-Cap | Technology, Healthcare |
| Large-Cap | Financials, Industrials |
| Mid-Cap | Industrials, Consumer |
| Small-Cap | Financials, Healthcare, Industrials |
Limitations
- Price-Based: Reflects market sentiment, not intrinsic value
- Volatile: Can change dramatically with price swings
- Debt-Blind: Doesn’t account for leverage (use Enterprise Value)
- Industry Differences: Hard to compare across sectors
