What market cap is
Market cap is the total value of a company's shares. Here is how it is calculated, what large-cap and small-cap mean, and what it does not tell you.
Market cap is short for market capitalization. It is the total value of all of a company's shares, based on the current share price. It is the most common way to say how big a company is on the stock market.
How it is calculated
Take the share price and multiply it by the number of shares the company has issued.
If a company has 100 million shares and each one trades at $20, its market cap is $2 billion.
That is the whole formula. Because the share price changes every time the stock trades, market cap changes all day while the market is open.
Share price alone tells you little
A high share price does not mean a big company. A low share price does not mean a small one.
Company A might trade at $500 a share but have only 10 million shares. Its market cap is $5 billion.
Company B might trade at $25 a share but have 1 billion shares. Its market cap is $25 billion.
Company B is five times larger on the market, even though each of its shares costs far less. To compare the size of two companies, compare market caps, not share prices.
Large, mid and small cap
Investors often sort companies into groups by market cap:
- Large cap. The biggest companies on the market. Many are well known household names.
- Mid cap. Companies in the middle range.
- Small cap. Smaller companies, often younger or more focused on one product or region.
- Micro cap. Very small companies. Their shares can trade in low volumes and swing widely.
There is no single official cut-off between these groups. Index providers and fund companies each set their own dollar ranges, and those ranges shift over time as the whole market grows or shrinks.
Why market cap matters
Market cap is used in a few important ways.
Index weighting. Many stock indexes are weighted by market cap. That means bigger companies have more influence on the index. The S&P 500 and the S&P/TSX Composite both work this way. A 2% move in one of the largest companies can move the index more than a 10% move in a small one.
Index membership. Some indexes are built around size. The Russell 2000 tracks smaller US companies, for example.
Risk and behaviour. Smaller companies tend to have bigger price swings than larger ones. They may have less cash, fewer products and fewer investors following them. This is a general pattern, not a rule for every stock. You can read more in what volatility means.
Float-adjusted market cap
Some shares are not really available to trade. Founders, governments or other companies may hold large blocks that they rarely sell.
Float means the shares that are freely available for the public to buy and sell. Many index providers use a float-adjusted market cap. It counts only those freely traded shares. This gives a better picture of how much of a company the market can actually trade.
What market cap does not tell you
Market cap is a price tag set by the market. It is not a measure of how much the business is worth on paper, how much profit it makes or whether it is a good investment.
- It does not include the company's debt. A company with a lot of debt can look smaller by market cap than it really is as a business.
- It does not tell you if the price is high or low compared with profits. For that, people use measures like the P/E ratio.
- It can change quickly. A company's market cap can rise or fall by large amounts in a single day if the share price moves sharply.
Enterprise value
Analysts sometimes use enterprise value alongside market cap. Enterprise value starts with market cap, adds the company's debt and subtracts its cash. It tries to show what it would cost to buy the whole business, including what it owes.
You do not need it to follow the news. It is useful to know the term exists, because it often appears in company reports.
Changes in share count
Market cap can also change when the number of shares changes. A company that issues new shares adds to its share count. A company that buys back its own shares reduces it. A stock split changes the number of shares and the price at the same time, so market cap stays about the same.
The short version
- Market cap is the share price times the number of shares.
- It measures size on the stock market, not the quality of the business.
- Compare market caps, not share prices, to compare company size.
- Large, mid and small cap ranges are set by each index provider, not by one rule.
- Many major indexes, including the S&P 500 and the TSX, are weighted by market cap.
This is general information, not investment advice.
Updated