What Is Market Capitalization?

How do you work out market cap?

Market capitalization, or market cap, is the value the stock market puts on all of a company's shares. To find it, multiply two numbers:

The number of shares means all the shares that investors own, called shares outstanding. Don't use the number of shares traded today. That is trading volume, and it is a different thing.

Harbor has the cheapest share but the biggest market cap. North has the most expensive share but is the smallest company. Calling Harbor a bargain because its share costs $5 mixes up the price of one piece with the value of the whole.

Why does market cap change every day?

Keep Maple's 80 million shares the same. If the price rises from $25 to $30, the market cap grows from $2 billion to $2.4 billion. That is a 20% rise. If the price falls to $20, the market cap drops to $1.6 billion.

No cash moves in or out of the company's bank account when this happens. The market is simply paying a different price for the same shares.

The number of shares can change too. Say the price stays at $25 but Maple goes from 80 million to 88 million shares. The market cap becomes $2.2 billion. The company may have sold new shares to raise money, bought another business with shares or paid staff in shares.

Ask what the company got in return. A bigger market cap does not prove that each existing owner is better off. Each old share is now a smaller slice of the company.

What happens in a stock split?

In a stock split, a company cuts each share into more pieces. Suppose Maple does a two-for-one split. Its 80 million shares at $25 become 160 million shares at $12.50. The market cap is still $2 billion.

If you owned 20 shares worth $500, you now own 40 shares, still worth $500. The share count doubled; the factories, sales and cash did not.

Real prices can still move around a split, because buyers react to many things. But the split itself only changes the number and size of the pieces.

This is also why price charts must be adjusted for splits. Without the adjustment, a chart would show a 50% "crash" that never happened. See how to read stock charts.

What are large-cap, mid-cap and small-cap stocks?

Investors sort companies into size groups by market cap. FINRA, a US regulator, gives these example ranges in US dollars:

By these ranges, Harbor ($3 billion) is a mid-cap and North ($1 billion) is a small-cap. Maple sits right on the $2 billion line between the two. FINRA notes that the lines between groups vary. Fund and index providers set their own limits, and a range in US dollars won't match one in Canadian dollars. Check the method behind any label. Read FINRA on market cap.

Many stock market indexes, which track a group of shares, are weighted by market cap. That gives bigger companies more influence on the result. But size is a description, not a safety label. A large company can still be overpriced or in trouble.

Which share count should you use?

You will see several share numbers. Shares outstanding are all the shares investors own. Authorized shares are the most shares the company is allowed to create. The float is usually the shares available for public trading, but each data provider defines it a little differently.

Some companies have more than one class of shares, sometimes at different prices. Check which classes a website includes. Promises to hand out more shares later, such as share options for staff, can also make the count grow.

Note the date and currency of the price, and the date of the share count. An old count with today's price can mislead after a company sells or buys back shares. US company filings are on SEC EDGAR, and Canadian filings are on SEDAR+, explained by the CSA. Elsewhere, use the company's latest annual report.

Is market cap the price of the whole company?

Not quite. Market cap only values the shares. A buyer of the whole company would also take on its debt and get its cash.

A simple version of enterprise value starts with market cap, adds debt and subtracts cash. Say Maple has a $2 billion market cap, $600 million of debt and $200 million of cash. Its simple enterprise value is $2 billion + $600 million − $200 million = $2.4 billion. Real calculations include more items.

So two companies with the same market cap can carry very different debts. Next, see how to buy part of an expensive share in fractional shares. To learn how funds hold many companies at once, read ETF vs mutual fund, or go back to stock market basics.