What is Market Capitalization?

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Definition:

Market capitalization (aka “market cap”) is one way to measure the size of a company by multiplying its total number of shares by its stock price.

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🤔 Understanding market capitalization

Market capitalization shows the dollar value of a company’s outstanding shares. To get this number, you multiply the company’s total number of shares by the price of each share. As the price of the stock changes (or the number of shares outstanding changes), so will the company’s market cap. Companies can be sorted into three market cap categories: “small cap” ( $300M–$2B), “mid cap” ($2B–$10B), and “large cap” ($10B+).

Example

Apple became the first company in history to reach a $1 trillion market cap on August 2, 2018. Doing the math: Its nearly 5 billion shares * the $207.05 share price it hit that day = $1 trillion. Since then, Amazon and Microsoft have also joined the “four comma club.”

Takeaway

Calculating market cap is like calculating the value of fruit on a pallet...

To quickly compute the value of the fruit, you would multiply the number of oranges by their price. For instance, 300 oranges * $2 = $600. Keep in mind, the number of oranges (and their price) could change.

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How is market cap calculated?

You only need two numbers to calculate a company’s market cap: the total number of outstanding shares of a company — including those held by officers and insiders, as well as people like us who own shares — and the real-time price of that stock. Because the share price of private companies isn’t publicly known, market cap is typically used in reference to publicly traded stocks. The simplicity of the market cap formula makes it a convenient way to quickly judge the size of different companies. But there are also more nuanced ways to value a company.

Here are the three main categories of market cap to keep in mind (as of Jun 6, 2019):

Small cap: Between $300 million and $2 billion

Mid cap: Between $2 billion and $10 billion

Large cap: $10 billion+

While small, mid, and large are the most traditional categories, labels have been made for the extremes as well:

Micro cap: Between $50 million and $300 million

Mega cap: Greater than $300 billion

Generally speaking, these ranges tend to drift higher over time as asset prices increase.

What is the difference between market cap and market value?

Want to know how much a company can be sold for? That’s its market value — the value that the company is worth in the market.

For public companies, one way to estimate its value is by calculating its market cap.

For private companies it’s a more nuanced (and subjective) calculation. Since private companies don’t have publicly-traded shares, it’s not entirely clear how much shares would be worth.

Even for public companies, it can be a challenge to estimate market value (i.e. what another buyer would actually pay for it). While market cap is one way to estimate, there are many other methods used. Some include pretty intense accounting, taking into consideration a company’s debts, growth prospects, taxes, and more. These estimates sometimes incorporate more fuzzy analysis, too — for instance, a company’s ability to innovate and broader trends in the relevant industry. Some approaches are more formula driven and use mathematical equations to estimate value. For example, multiples let you take one known metric of a company and turn it into an estimated market value.

Why do market caps matter?

Market cap can be helpful to investors for two main reasons:

  1. Market cap is a quick way to get a possible feel for the size of a company and its maturity.
  2. Market cap might be able to give you insight into the riskiness of an investment. Companies with smaller market caps may be less mature businesses, while large cap companies may have a more established market position.

Why stock splits don’t affect market cap

A stock split occurs when a company wants to decrease the price of its stock — So, the company splits its shares into multiple, smaller ones. (It’s like cutting a pizza into 8 slices vs. 4 — the size of the pizza hasn’t actually changed.)

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The free stock offer is available to new users only, subject to the terms and conditions at rbnhd.co/freestock. Free stock chosen randomly from the program’s inventory. Securities trading is offered through Robinhood Financial LLC.

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