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What is Market Capitalization?

Definition: The market capitalization, also known as market cap, is the total value of shares of a firm, a sector, or a market. If a company has common and preferred shares, the market cap is the sum of its common and preferred shares multiplied by the current stock price.

What Does Market Capitalization Mean?

What is the definition of market cap? The market cap is a measure of a firmís size. Firms are divided into:

  • Large-caps: > than $10 billion
  • Mid-caps: > $2 billion and < $10 billion
  • Small-caps: > $300 million and < $2 billion

The large caps are the blue chips of each sector or industry, whereas the mid-caps are usually growth-oriented firms that seek expansion. To calculate a firmís market capitalization formula, we need to know the stock price and the number of shares outstanding.

Letís look at an example.

Example

Company A has 620,000,000 shares outstanding that trade at a current price of $22.56. The companyís market capitalization is $18.65 x 620,000,000 = $13,987,200,000. This is a large cap company since its cap is almost $14 billion and it is probably a well-established, maybe even a leader in its industry. Large-caps tend to dominate their industry and perform better in recessions, but they usually underperform the small-caps after a recession.

Company B has 189,635,000 shares outstanding that trade at a current price of $12.44. The companyís market capitalization can be calculated like this $12.44 x 189,635,000 = $2,359,059,400. This is a mid-cap company represented with a 2.36 billion cap. This most likely is a growth-oriented company, seeking expansion in new markets.

Company C has 6,256,000 shares outstanding that trade at a current price of $65.25. The company's market cap is $65.25 x 6,256,000 = $408,204,000. This is a small-cap company with a $408 million capitalization. This is probably a risky, quite volatile stock that underperforms both the large-caps and the mid-caps. However, small-caps tend to outperform the large caps after a recession.

Summary Definition

Define Market Cap: Market capitalization is how much all of the outstanding shares of a company is worth at the current market price.

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