What is Market capitalisation?

Market capitalisation, usually shortened to market cap, is the total value the stock market places on a company at a given moment. It is the current share price multiplied by the number of shares outstanding, meaning all the shares the company has issued that are held by investors. If someone bought every share at today's price, the bill would roughly equal the market cap. Because share prices change every trading day, market cap changes with them.

Here is a hypothetical example. Say a company has 50 million shares outstanding, each trading at $40. Its market cap is 50,000,000 × $40 = $2 billion. If the price rises to $50 and the share count stays the same, the market cap becomes 50,000,000 × $50 = $2.5 billion, an increase of $500 million, or 25%. A second company with 10 million shares at $200 also has a market cap of 10,000,000 × $200 = $2 billion. Its share price is five times higher, yet the two companies are the same size.

Investors use market cap to sort companies into large-cap, mid-cap and small-cap groups, although the boundaries differ between index providers. It also shapes most major indices. An index is a list of companies whose combined performance represents a market. In a cap-weighted index such as the S&P 500 or the Nasdaq-100, each company counts in proportion to its market cap, so the largest firms have the biggest influence on the index's return.

A common misunderstanding is to read a high share price as a sign of a big or expensive company. Price alone says nothing about size; only price combined with share count does. Market cap also says little about whether a company is cheap or expensive, which depends on its profits, assets and debts. It counts only the value of the shares, not the company's borrowing. And in a cap-weighted index a handful of very large companies can dominate, so a broad-looking fund may be more concentrated than its name suggests.

For a private investor building a long-term portfolio, market cap explains what an index fund actually holds. An S&P 500 fund such as SPY owns companies roughly in proportion to their market value, which keeps turnover (the share of holdings bought and sold each year) and costs low, but ties results closely to the largest firms. Knowing this helps investors judge how diversified their portfolio really is.

By Dr. Harry Hamann

How do you calculate market cap?
Multiply the current share price by the number of shares outstanding. A company with 100 million shares at $20 each has a market cap of $2 billion. Because the price moves during trading, the figure changes throughout the day.

Does a higher share price mean a bigger company?
No. Size depends on share price and share count together. A $500 share in a company with few shares can represent a smaller business than a $20 share in a company with billions of shares outstanding.

What is a cap-weighted index?
An index in which each company's weight matches its share of the total market cap of all members. The S&P 500 works this way, so its largest companies have the greatest effect on the index's daily and long-term returns.