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Two Quick Points to Simplify Market Capitalization
Total dollar market value of a company
What is market capitalization, also referred to as market cap for short? Market cap is the total dollar market value of a company’s outstanding shares of stock. It is typically used to determine the size of a publicly-traded company instead of a figure like sales or total assets. The following two points will help to simplify market cap further:
1. Market Cap Formula
2. Different Market Cap Categories
1. Market Cap Formula
Market Cap = Current Share Price * Total Number of Shares Outstanding. For example, if Company A’s current share price is $50 and it has 100 million shares outstanding, its market cap is $5 billion because $50 * 100 million = $5 billion. A company’s market cap is first established when it becomes publicly-traded via an initial public offering (IPO).
2. Different Market Cap Categories
The three primary market cap categories are large-cap, mid-cap, and small-cap. Large-cap companies have a market cap of $10 billion or more. Mid-cap companies have a market cap of $2 billion to $10 billion. Small-cap companies have a market cap of $300 million to $2 billion. Company A from the earlier example would be considered a mid-cap company because its market cap of $5 billion is between $2 billion and $10 billion.
When it comes to investing, large-cap companies are often considered safer investments because they are typically more established companies with a generally longer business history. It is important to note that market cap does not affect a company’s share price. Rather, it is calculated by analyzing the share price and the number of shares outstanding. Now that you have a better understanding of market cap, let me know three companies that fall into each market cap categorization in the comments.
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