What Is Market Cap?
Market capitalization (Market Cap) refers to the value of all outstanding shares of a company’s stock at the total dollar market value. Market cap is one way to look at the relative size of a company.
Market Capitalization Formula
The market cap is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share. For example, a company that has 20 million shares that are selling at $100 each would have a market cap of $2 billion.
Is Market Cap the Same as Equity Value?
Although market cap and equity value are similar and sometimes used synonymously, they are different as the market cap only measures the aggregate costs of the company’s shares. The equity value is calculated similarly as the market cap, but it factors in convertible securities, the value of stock options, as well as the company’s other assets and liabilities.
Why Is Market Cap Important?
The market cap is important as it determines information investors need to know before or after investing. The market cap value and the size of the company are positively correlated: the higher the value, the “bigger” the company and vice versa. This is key to know because the company’s value and size can affect their level of risk and their investment return over time.
That being said, an efficient way to categorize public companies are by their size – small-cap, mid-cap, and large-cap. This will allow investors to create a balanced portfolio and optimize for long-term growth. Usually, small-cap companies have a market cap between $300 million and $2 billion, mid-cap companies have a market cap between $2 billion and $10 billion, and large-cap companies have a market cap that is larger than $10 billion.