Calculating Market Cap
Market capitalization—often shortened to market cap—refers to the total dollar market value of a company’s outstanding shares of stock.
Market cap serves as a quick and dirty way for investors to understand and assess the size of publicly traded companies and make assumptions about their risk profiles as a result.
Calculating Market Cap
Market cap can be calculated using basic arithmetic.
Simply multiply the number of outstanding shares by the current share price to arrive at the current market capitalization.
Using this calculation, a company whose stock trades for $50 per share with 100,000 shares outstanding has a market cap of $5 million ($50 x 100,000 shares).
Investors assume that the market cap is proportionate to the size of a company.
Generally speaking, the size of a company offers some indication to investors about how they can expect it to behave with regard to returns and risk.
Companies are typically categorized based on their market cap. The standard small-cap, mid-cap, and large-cap classifications have been modified to also include micro-cap and mega-cap stock classifications on either end of the scale.
Market Cap and Risk
Micro-cap stocks are any stocks with a market capitalization between approximately $50 million and $300 million.
As the name implies, these are some of the smallest companies on the major exchanges.
Companies classified as small-cap start at about $300 million and include those up to roughly $2 billion in market capitalization.
Mid-cap stocks top out at $10 billion, where the large-cap designation begins, and the largest companies, those with over $200 billion in market capitalization, are considered mega-cap.
It is worth noting that stocks may have very high share prices with lower market caps and vice versa.
As savvy investors know, a quick glance at the share price of a company tells us almost nothing about the company as a whole. Because market capitalization is based on the share price in conjunction with the total number of outstanding shares, share price is just one part of the equation.
Large-Cap and Mega-Cap Stocks
Generally speaking, the smaller the company, the greater the risk and the potential reward. Large-cap companies and their bigger siblings mega-cap companies are those that have been around for a long time.
Unlike small-cap companies hey have stable, predictable revenue streams and a solid business foundation. They have the ability to weather stormy market conditions, and the stock price of these companies does not normally fluctuate wildly.
An investment in a large- or mega-cap stock often carries lower risk. The rewards come in the form of dividend payments or share value appreciation over time.
Micro-Cap and Small-Cap Stocks
On the capitalization spectrum, small-cap companies are much smaller and often newer than their large-cap counterparts.
These companies serve a more niche market, have a single revenue stream, or are still very much in their growth period. They are seen as riskier investments.
Their business models are largely untested by time and they have a limited operating history. Additionally, because they have fewer resources, on average, they can be very sensitive to negative market conditions.
Micro- and small-cap companies can deliver something that larger companies cannot, however—growth.
Since these companies are still in their growth stages, there is an opportunity for the share price to appreciate quickly and to produce returns much higher than those of more stable, predictable companies.
These companies are considered high risk, high reward.
Mid-cap companies fall between the two ends of the spectrum. They are still growing and expanding but they have a longer operating history than their small-cap counterparts.
Considered riskier than large-cap stocks but safer than small- and micro-cap stocks, mid-cap stocks split the difference for risk and reward.