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Market capitalization, or market cap, is the current share price of a public company multiplied by its total outstanding shares. It measures the market value of those shares—not necessarily the value of the entire business. Market cap changes when the share price or the number of outstanding shares changes.

How to calculate market capitalization

The formula is:

Market capitalization = current share price × total outstanding shares

For example, FINRA’s April 26, 2018 explainer uses a company with 5 million outstanding shares priced at $20 each: 5 million × $20 = $100 million in market capitalization. [FINRA]

The share price is a per-share figure; market cap combines it with the share count to estimate the total market value of the company’s public shares. That is why comparing share prices alone can mislead: two companies can have the same price per share but very different market caps.

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Why market cap changes

Market cap has two inputs: share price and outstanding shares. A change in either one changes the result.

Share-price changes

When the share count stays the same, a rising or falling share price moves market cap in the same direction. Investors’ expectations about a company’s prospects, including future growth or products, can affect what they are willing to pay for its shares. Those expectations can change over time. [FINRA]

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Share-count changes

If the number of outstanding shares changes, the calculated market cap can change even when the quoted share price does not. When comparing market-cap figures, check the date and the share-count basis used. The definition establishes the formula, but providers may use different conventions; consult the specific provider’s methodology rather than assuming all figures use the same share-count basis.

What market cap tells you—and what it does not

Market capitalization describes the market value of a company’s shares. It is not necessarily the value of the whole business, and it cannot by itself establish whether a stock is cheap, safe, stable, or likely to grow. FINRA recommends treating it as one tool among several when evaluating an investment. [FINRA]

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Share price is not a measure of company size on its own. FINRA’s 2018 example compares two companies at $50 per share: one with 5 million shares has a market cap of $250 million; another with 5 billion shares has a market cap of $250 billion. The 1,000-fold difference comes from the share count, not the quoted price. [FINRA]

Nor does a large market cap guarantee that a company will remain successful. FINRA cites WorldCom, which reached a market capitalization of about $186 billion in 1999 before filing for Chapter 11 bankruptcy in July 2002. That historical example illustrates why size is not a substitute for examining a company’s broader circumstances. [FINRA]

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What large-cap, mid-cap, small-cap, and micro-cap mean

These labels describe company size by market capitalization. They are useful shorthand, but there is no single set of thresholds established by the cited sources. Investor.gov lists large-cap, mid-cap, and small-cap as size and market-value terms without specifying cutoffs. [Investor.gov]

FINRA’s April 2018 article gives the following general ranges. Treat them as that source’s dated ranges, not universal or current official boundaries:

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Category FINRA’s general range (2018)
Large-cap $10 billion or more
Mid-cap $2 billion to $10 billion
Small-cap $250 million to $2 billion
Micro-cap Below $250 million

Because definitions can vary, check the source’s stated criteria before comparing category labels across funds, indexes, or investment materials. [FINRA]

How market cap affects index weighting

Some indexes use market capitalization to determine how much weight each company receives. In a market-cap-weighted index, companies with higher market caps make up a larger share of the index’s overall value. In a price-weighted index, a security’s per-share price determines its weight instead. [Investor.gov]

An index fund is a mutual fund or exchange-traded fund that seeks to track an index. A fund may hold every security in its index or sample some of them. Its results can differ from the index because of tracking error, fees, and other risks. Investor.gov also cautions that not every index fund costs less than an actively managed fund, so compare a fund’s actual expenses and approach rather than assuming all index funds are alike. [Investor.gov] [Investor.gov]

Product prices and availability are accurate as of the date/time indicated and are subject to change. Any price and availability information displayed on Amazon at the time of purchase will apply.

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