A company’s market cap (market capitalization) is defined as the total number of outstanding shares of stock multiplied by its share price.
For example:

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)

Market cap is commonly used to assess the overall value and size of a company. Theoretically, the company with a $5 million market cap could be bought out entirely for $5 million, assuming all of the company’s shareholders were willing to sell off their shares to the buyer. Market cap is presumed to be proportionate to the size of a company. It is used to determine whether a company is considered “small-cap,” “mid-cap,” or “large-cap.”

Related: What does IPO stand for?

Market Cap Sizing

Small-cap stocks are generally thought to be those with a market cap less than $1 billion. Examples of small-cap stocks include:

 Dorchester Minerals LP (NASDAQ: DMLP) – Market cap of about $475 million

 AppFolio Inc. (NASDAQ: APPF) – Market cap of about $614 million

Mid-cap stocks are generally thought to be those with a market cap between $1 billion and $10 billion. Examples of mid-cap stocks include:

Transocean Ltd (NYSE: RIG) – Market cap of about $4.26 billion

Omega Healthcare (NYSE: OHI) – Market cap of about $5.62 billion

Large-cap stocks are generally thought to be those with a market cap over $10 billion. Examples of large-cap stocks include:

Apple Inc. [NASDAQ: AAPL] – Market cap of about $885.67 billion

General Electric Co. [NYSE: GE] – Market cap of about $174.66 billion

Related: What are the “options” in options trading?

The Relationship Between Market Cap And Investing

Stocks may have very high share prices with lower market caps and vice versa. It is important, especially for newer investors, to recognize that market cap, not share price, is the metric that most adequately describes the value of a company. Smaller-cap stocks are generally considered to be higher risk, higher reward. Small-cap stock prices tend to be more volatile than large-cap stock prices, so if you’re investing significant sums of money into small-cap stocks, brace yourself for a potentially wild ride. Large-cap stocks, though they certainly have the potential to be volatile, are less likely to swing dramatically in value over short periods of time. They are considered lower risk, lower reward investments relative to smaller-cap stocks.

Related: Use these tips to become a better options trader.

Related Reading

Broaden the success of your investment strategy and learn the tools and techniques needed to diversify your portfolio for a bright financial future with these related titles.

Read more about investing topics and diversify your strategy. Our Options Trading QuickStart Guide is a bestselling hit.
Broaden your investment strategy and diversify your portfolio. This Penny Stock Investment QuickStart Guide has all the info you need to successfully trade penny stocks.