Market cap or market capitalization is simply the total worth of a company in terms of it’s shares. In other words, if you were to buy all the shares of a particular company, what is the total amount you would have to pay? That amount is called the “market capitalization”. For example, we want to calculate the market capitalization of a company we would take its current market price and multiply it with the number of its outstanding shares. If company ABC’s stock is selling for Rs 20 per share and there are 1,000 shares issued by the company, then the market cap for the company ABC is Rs 20,000. Since the stock price varies daily, the market cap for a company also varies from day to day.
Market Cap = # of shares outstanding * Share price
Market Cap is a very frequently used stock market term by the investors. While doing research on which type of stock to buy, most investors choose the market cap of the company. As market cap tells you what stock price does not. Many people think that higher stock price means a bigger company but that is not true. A company with stock price of Rs 80 having 5 billion outstanding shares is bigger than a company having stock price of Rs 120 but having only 1 billion outstanding shares.
Different Types of Capitalization
So you might have heard companies being categorized as small cap, mid cap, or large cap. What exactly do these terms mean? Well, market cap is used to compare companies based on their size. It helps us determine whether we can consider a company small, medium, or large. While there is not a set framework for defining the different market caps, here are the widely published standards for each capitalization
There are only the industry leaders present in this category since these companies have greater than $200 billion as market cap.
Big / Large Cap
These companies have a market cap between $10 billion to $200 billion. Many well-known companies fall into this category as large-cap stocks are considered to be relatively stable and secure.
Ranging from $2 billion to $10 billion, this group of companies is considered to be more volatile than the large- and mega-cap companies.
Typically new or relatively young companies, small caps have a market cap between $300 million to $2 billion. Small caps do present the possibility of greater capital appreciation – but at the cost of greater risk.
Market capitalizations between $50 million to $300 million fall into this category. The upward potential of these companies is similar to the downside potential, so they do not offer the safest investment.
Companies having market caps below $50 million are nano caps. These companies are the most risky, and the potential for gain is often relatively small.
*** Growth companies dominate small and mid cap ranges.
*** Value companies dominate the large and mega cap ranges.