What Is Market Capitalization? Definition and Why It's Important
By Indeed Editorial Team
Updated September 2, 2021 | Published February 25, 2020
Updated September 2, 2021
Published February 25, 2020
Market capitalization, also known as “market cap,” is how much a publicly traded company is worth based on its total stock value.
To calculate the market cap of a company, multiply the company’s outstanding stock shares by the price of one share. This value determines the level of market cap, from a nano-cap to mega-cap, which typically correlates to the company’s associated investment risk.
Investors and those working in the financial sector use market cap to determine what companies to invest in and additional research that may be needed.
Market capitalization refers to how much a publicly traded company is worth based on its total stock value within the larger stock market. This is often referred to as "market cap.”
Market cap only reflects a company's market value, not its debts or liabilities. Market cap is useful for determining a company's size, which can indicate a lot about a company's potential for an investor.
For example, large companies are usually safer investment choices due to their longevity and stability. Smaller companies, which are often younger, may offer more rewards as they grow but usually carry heavier risk. These levels of risk are divided into five categories by market value.
How to calculate market cap
To calculate a company's market capitalization, take the number of shares of stock issued by the company and multiply it by the closing price of one share.
Number of stock shares x Closing price per share = Market capitalization
Here’s an example:
Publicly traded company ERB has 10 million stocks issued. An individual stock costs $20 at the close of the market. Multiplying the issued stock number by the cost of an individual stock results in a market capitalization of $200 million. If ERB's stock prices go up to $30 a share at 10 million stocks, its market capitalization would be $300 million.
Related: Why Market Value Is Important
Why is market capitalization important?
Market capitalization provides a quick measurement of the size of a company and the relative risk of investing with that company. Here are some important details about market capitalization for both investors and employees in the financial sector, such as financial advisers:
Individuals participating in the stock market will likely find researching the market capitalization of companies valuable as they decide where to put their money. Differences in market capitalization generally mean differences in the risk associated with a particular stock.
Most investors choose to diversify their portfolios by selecting stocks from large-cap, mid-cap and small-cap companies. This allows investors to take some risks, but balances that risk with steady, if low-returning, stocks.
Many jobs within the financial sector use market capitalization frequently, such as:
Many other occupations also might benefit from an understanding of market capitalization. Regardless of your position, understanding the risk and reward for your client is vital, in addition to being able to explain this information to them.
Levels of market capitalization
Traditionally, there are three levels of market capitalization: large-cap, mid-cap and small-cap. However, in recent years, mega-cap and micro-cap have been added to the top and bottom of these levels to reflect company size ranges, while nano-cap refers to “penny stocks” with the highest risk.
These levels are set based on the market capitalization value. Each level has a range, though the ranges are not standardized and may vary from one source to another.
|Market cap company level||Market value range|
|Large-cap||$10 billion–$200 billion|
|Mid-cap||$2 billion–$10 billion|
|Small-cap||$300 million–$2 billion|
|Micro-cap||$50 million–$300 million|
This level describes the biggest companies. Mega-cap companies generally have a market value of more than $200 billion and are often the most conservative choice for investors. A mega-cap company's large size generally means it will provide a low but consistent return on investment.
Large-cap describes companies with a market value of $10 billion to $200 billion. Investing in large-cap companies is often a safe choice because they are large enough to provide security and consistency for investors.
Related: Guide To How To Become an Investor
Mid-cap refers to companies with a market value between $2 billion and $10 billion. Mid-cap companies offer a balance between the conservative, slow growth of mega-cap and large-cap investments, but are still relatively safe. You should research mid-cap companies and look at their financial history when choosing how much money to invest.
Small-cap companies have a market value between $300 million and $2 billion. These companies are generally much younger than those in higher levels. Investing in a small-cap company is risky, but the rewards can be high as the company grows and increases in overall value. This is another level that requires research before investing.
Micro-cap companies generally have a market value between $50 million and $300 million and offer the same risks and rewards as small-cap companies. Often, the financial sector won't differentiate between micro-cap and small-cap and will instead include all companies at these two levels in small-cap.
Similarly, publicly traded companies with a market value of less than $50 million are referred to sometimes interchangeably as nano-cap companies or micro-cap. Nano-cap companies are some of the riskiest to invest in, but also growing in popularity.
Market cap investment example
Market capitalization is an important term for individual investors and those who work or hope to work in the financial sector. Understanding how to appropriately value companies makes the task of managing your money—or the money of your investors—much easier.
Relying on data and research can also lead to increased earnings as an investor or financial adviser.
Example: Imagine you are a financial adviser. Think back to the earlier example about the publicly traded company ERB. The company has issued 10 million stocks, and an individual stock costs $20. Based on these numbers, the market cap for ERB is $200 million. Therefore, ERB is a micro-cap company. Investing there may give a great return, but it's a risky choice.
As a financial adviser, you’ll want to research the company's financial history and stock trends to present to your client before investing.
Related: 6 Types of Finance Jobs
Browse more articles
- A Definitive Guide to the Toolbar in Excel (With Benefits)
- 17 Types of Workflow Management Software and Why To Use Them
- What Is PaaS? (Definition, Types, Benefits and Drawbacks)
- What Is Security Testing? (With Types and Related Jobs)
- FAQ: What Is a 1-Year MBA? (Plus Benefits and Pros and Cons)
- How To Set up a Zoom Meeting in Outlook (Plus Benefits)
- What Is MSP in IT Services? Benefits and How To Use it
- FAQs: Secondary Research (What It Is and When To Use It)
- Snowball Sampling: What It Is and How To Use It in Research
- What Is a Psychology Fellowship? (With Definition and FAQ)
- What Is Net Income?
- What Is Operational Risk Management? (Definition and Tips)