Market Capitalization

Market capitalization = current share price × total shares outstanding, giving the total market value of a company's equity.

How market cap is calculated

The SEC's Investor.gov glossary defines market capitalization as the value of a corporation determined by multiplying the current public market price of one share by the number of total outstanding shares. FINRA's guide to stocks calls market cap one measure of a company's size and notes that there are no fixed cutoff points for large-, mid- or small-cap companies. As a rough convention it cites small caps valued at less than $2 billion, mid caps between $2 billion and $10 billion and large caps over $10 billion, while noting the numbers might be twice those amounts; micro caps are smaller still. Market cap measures only the equity, not the debt a company carries, so two firms with the same market cap can have very different enterprise values once borrowings and cash are included.

Hypothetical example: 50 million shares at $40 give a market cap of $2 billion, on the border between small and mid cap by FINRA's ranges. At $50 it is $2.5 billion though nothing about the business changed. See price-to-earnings.

Why market cap matters to index investors

Most broad stock indexes, and the index funds and ETFs that track them, weight their holdings by market capitalization, so the largest companies receive the largest share of every dollar invested. A company's market cap therefore determines both which index it belongs to and how much it moves that index. Size categories are also used to describe risk and style: FINRA notes that smaller companies' shares are often more volatile and thinly traded than those of large, established firms, while large caps have wider coverage and more liquid trading. Because market cap changes every time the share price moves, a company can drift from one category to another without issuing or retiring a share. A handful of very large companies can account for much of a broad index's return in a given year.

Hypothetical example: in a cap-weighted index of two stocks worth $800 billion and $200 billion, a 10% gain in the smaller adds 2% to the index while the same gain in the larger adds 8%. See the portfolio concentration calculator.