Market Capitalization is calculated by multiplying the share price by the total number of shares. Even though market cap measures the cost of buying all of a company’s shares, it does not determine the amount the company would cost to acquire in a merger transaction. It’s worth noting that fully-diluted market cap can lead to a calculation of fully-diluted enterprise value as well. That calculation should account for the cash infusion from option and warrant exercise. Special purpose acquisition companies, or SPACs, are shell companies used to bring private companies to the public market. SPACs almost always provide warrants to investors that are valid for as long as five years after the SPAC merges with the target company.
If you’re building a portfolio yourself, it can be a lot of work to analyze and choose individual companies to invest in, plus assemble a well-diversified portfolio of individual stocks. ETFs and mutual funds might be able to help you achieve your targeted asset allocation, including your desired allocation among market-cap segments, without having to research hundreds of companies yourself. Market cap considers all of a company’s outstanding shares, and is a common measure used to describe a company’s value. If your goal leans more toward stability, you can focus on large-caps, but you can also include smaller companies with growth potential to provide some extra juice to the portfolio.
- However, market cap can fluctuate greatly day-to-day, especially in smaller companies, as the stock bounces around.
- A company with net cash will have an enterprise value less than its market cap.
- Companies that are considered micro-cap consist mostly of penny stocks—this category denotes companies with market capitalizations between $50 million to $300 million.
- Examples of large-cap companies include Apple Inc., Microsoft Corp., and Alphabet Inc.
- Small-cap stocks are therefore often more volatile than those of larger companies.
Ask a question about your financial situation providing as much detail as possible. Our mission is to empower readers with the most factual and reliable financial information possible to help them make informed decisions for their individual needs. At Finance Strategists, we partner with financial experts to ensure the accuracy of our financial content. This metric facilitates performance comparisons, aids in investment attraction due to liquidity and credibility, and guides investment strategies based on perceived stability. The caveat to financing via more debt is a reduction in equity value, all else being equal. The difference between the conceptual meaning of enterprise value (TEV) and the market value of equity (MVE) is as follows.
For example, a company could have had twice as much revenue as any other company in the industry. However, if the company’s market cap is four times as large, the argument could be made that the company is underperforming. The higher the value of market capitalization, the “bigger” companies are perceived. For instance, technology companies often have higher market caps compared to firms in traditional sectors like manufacturing. Companies in certain sectors might naturally have higher market capitalizations than those in other industries, even if they generate similar revenues or profits.
Conversely, it can have “net cash,” in which its cash hoard is greater than its outstanding debt. For clarity’s sake, investors are best off using the correct term “market cap” instead of the less-focused “valuation”. An investor might say, for instance, that a stock has an attractive valuation.
Misconceptions About Market Capitalization
Companies with a market capitalization between $250 million and $2 billion are commonly classified as small-cap companies. These companies are considered higher-risk investments due to their age, the markets they serve, and their size. Small-cap share prices may be more volatile but provide greater growth opportunities than large caps. In stocks, market cap is calculated by multiplying the number of shares outstanding by the stock price.
How a company’s market cap is classified
In effect, the formula isolates the value of the company belonging solely to common equity shareholders, which should exclude debt lenders, as well as preferred equity holders. For privately held companies, this particular approach is the only viable method to compute equity value, as these companies do not have a readily available public share price. The Market Cap—or “Market Capitalization”—is the total value of a company’s equity mining benchmark from the perspective of its common shareholders. Most major market-cap-weighted stock indexes, like the S&P 500® and Russell 2000 use free-float market cap in determining how large of a weighting to assign companies. It’s a back-of-the-envelope way of putting a number on a company, but it’s just one way of measuring this.
Consider More Data Points
Investors use this figure to determine a company’s size instead of sales or total asset value. In an acquisition, the market cap helps determine whether a takeover candidate represents a good value for the acquirer. One example is JetBlue Airways (JBLU), which had a market cap of $1.93 billion as the market close on June 18, 2024, putting it on the high end of small-cap stocks. Track records of such companies aren’t as long as those of the mid-to-mega-caps, but they also present the possibility of greater capital appreciation.
Through categories such as mega-cap, large-cap, mid-cap, small-cap, and micro-cap, investors can assess companies of varying sizes, each category indicative of distinct risk-reward profiles. These companies tend to have stable earnings, and many of them pay dividends. Investing in large-cap stocks is often considered less risky compared to mid or small-cap stocks.
Market capitalization is a term used to describe the size of a company based on the total value of the company’s stock. Market capitalization is an important data point for making informed investment decisions, managing return expectations and building a well-balanced portfolio. The last group, small-cap companies, includes ones with a market cap lower than $2 billion. The risk here is the highest among these three groups, but they might give investors the highest return on investment. Mid-cap companies are those with a market cap between $2 and $10 billion.
Market cap is essentially a quick estimate of a company’s value, in dollar terms. While the upward potential of such companies is high if they succeed, the downside potential is equally worse if they completely fail. Investments in such companies may not be for the faint-hearted and require more due diligence.
Meanwhile, Berkshire Hathaway (BRK.A) had a much higher stock price of $615,000 per share but a lower market cap of $880.94 billion. Comparing the two companies by solely looking at their stock prices would not give a true representation of their actual relative values. Mega-cap companies are those with a market cap of $200 billion or higher. They are the largest publicly traded companies by market value, and typically represent the leaders of a particular industry sector or market.