Sometimes called market cap for short, the simpliest way to think about market capitalization is the estimate of how much you can buy a company on the open market assuming you have the cash lying around to do so. For a public company, the market cap is basically:
the share price x the number of shares outstanding.
For example. if a company has 30 million shares floating out there and each share is worth $100, then the market cap of the company is $3 billion.
Classification of Market Cap
When we talk about market cap, we often hear companies being referred as a large, mid or small cap company. While there’s no rule that defines what these requirements are, the general rule to categorize these are:
- Large Cap – A company with a market cap of more than $5 billion
- Mid Cap – Companies having a market capitalization of $1 billion to $5 billion
- Small Cap – Anything less than $1 billion
Later on, other terms started appearing like Mega Cap (something much bigger than large cap) and Micro cap (for penny stocks for example), but these terms are used more to aid conversations more than anything else.
How Market Capitalization is Used
The market cap of a company is vital in the financial industry. Here are some areas where it is used:
- Mutual Funds – Many mutual funds are geared towards a specific market cap category. For example, a large cap growth fund should only invest in large cap companies.
- Indexes – Some of you may not know that the S&P 500 has a requirement for the included companies to be at least $3 billion in market capitalization. Even though this stock market downturn has made many companies fail this test, the rule hasn’t changed (at least not yet as of writing).
- Investors – In general, the market cap is another indication of how liquid a particular company’s stock is. The higher the market cap, the more shares outstanding (in general).