Market Capitalization | Definition/ˈmärkət/ /kapədlˌīˈzāSHən/
a measurement of a company's financial size; a valuable indicator of where a company sits in share price and risk investment
Next word Dividend Reinvestment Plan (DRIP) ᐳ
When you research a publicly-traded company, its market capitalization is listed in its stock market summary.
Market capitalization, also referred to as a market cap, is a measurement of a company's financial size and is a valuable indicator of where a company sits in share price and risk investment. Investors use market capitalization to determine a company's financial capacity and perceived value in the stock market. For investors, understanding the value of a company before purchasing a stock is very important.
Understanding Market Capitalization
Let's use Perry's Pizza's stock as an example to help you learn how to determine a company's market capitalization.
- Perry's Pizza is a publicly-traded company with 1 million worth of outstanding shares.
- The company's current stock price value is $75 per share.
To determine a company's market capitalization, you will use the following formula:
Number of Outstanding Shares x Share Price = Market capitalization
Therefore to get the market cap of Perry's Pizza, you will need to multiply the number of outstanding shares (1 million) by the share price ($75 per share). Using the formula, Perry's Pizza's total market cap is $75 million.
Market Capitalization Ranges
Investors can divide and assess companies according to their market cap range.
Here's how you can determine a company's market capitalization range.
Mega-cap companies tend to be highly successful in their respective industry. Therefore, investors are more inclined to invest in mega-cap companies because of their proven success rate over a long period of time. In addition, investors typically like mega-cap companies because of their consistent growth rate in share value and their dividend payouts. Examples of mega-cap companies include Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT).
Mid-cap companies are expected to excel quickly and are generally still expanding their business. Although mid-cap companies have a higher risk level, investors are more attracted to mid-cap companies because of their vast opportunities for growth, productivity, and expansion. Examples of mid-cap companies include Helen of Troy Limited (NASDAQ: HELE) and Eagle Materials (NYSE: EXP).
Small-cap companies are usually younger companies that are new to their respective industries or serve a specific audience. Small-cap companies are considered a more volatile investment due to the company's age, size, and niche market. Examples of small-cap companies include Celsius Holdings (NASDAQ: CELH) and ACM Research (NASDAQ: ACMR).
Smaller companies with a market capitalization below $50 million are considered nano-cap companies.