What is market capitalisation, and is it a good measure of success?

Market capitalisation is one of the most widely-used fundamental metrics used to calculate a company’s worth. Discover what market cap is, how to calculate it and how useful it is as a measuring tool.

Microsoft

What is market capitalisation?

Market capitalisation, often called market cap, is the total market value of a publicly traded company’s outstanding shares. It is equal to the current price of one share multiplied by the total number of shares.

As the company’s shares are bought and sold on the open market, the total market capitalisation can provide indicators about the general sentiment toward a company’s net worth. This is why market cap is used in some forms of stock valuation methods.

But it’s important to remember that market cap is a product of speculation, which means it can diverge from the intrinsic value of a stock.

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What is the market capitalisation formula?

The market capitalisation formula multiplies the company’s current market price per share by the total number of outstanding shares to get the company’s total equity value.

This looks like: Market capitalisation = current share price x number of outstanding shares

How to calculate market cap

To calculate the market capitalisation using the formula above, you’ll need to know two things:

  1. The current selling price of its shares on the stock market, which you can find in our platform (log in or create an account to access it) or other quoting services
  2. The number of outstanding shares, which is the total number of shares that are listed and available to trade on an exchange. This number will be accessible on the stock exchange’s website

Let’s look at an example of how to calculate market cap. Say Amazon (AMZN) has 504 million shares outstanding, and the most recent closing price of its shares was $3,100. Amazon’s market capitalisation would be $1.56 trillion.

What are the different market cap sizes?

There are three different market cap sizes:

  • Small-cap companies: These are companies with a market capitalisation of $300 million to $2 billion. They could be relatively young or be in niche sectors or emerging industries, which means they’re often considered riskier as they lack the strength to cope with economic downturns. This makes their share prices more volatile, and means there can be less trading volume and less liquidity compared to larger companies. Despite the inherent risk, these firms can sometimes offer better growth opportunities
  • Medium-cap companies: These companies generally have a market cap of $2 billion to $10 billion. They’ve proven their credibility and operate in industries expected to grow. Analysts and investors expect mid-caps to be expanding. Because they have less of a track record, the risk is proportionately higher compared to large caps but lower than small caps. Many growth firms fit into the category of mid-caps, and that growth potential can be attractive
  • Large-cap companies: These are companies that have a market capitalisation of $10 billion or more. Large caps, also known as blue-chip stocks, are established companies with long track records of success. The return on investment might not be as quick or spectacular as small or mid-cap growth stocks, but large caps often pay out dividends when possible, and the share price fluctuations are historically less volatile

What is the market cap used for?

Market cap is used as a vital component of stock analysis, which helps investors decide whether a company is a worthwhile opportunity. It’s a helpful metric for comparing market prices to a company’s profitability and intrinsic value of its stock, using metrics such as price-to-earnings, price-to-book, and free-cash-flow.

Aside from analysis, here are a couple of other uses for market cap:

Investing by market cap

Investors searching for value stocks for their portfolio might consider investing by market cap, which would usually mean relying on the relative security that large-cap stocks can offer.

Certain fund managers may have instructions to invest in large-cap firms only or have a remit to continually balance their portfolios to ensure a specific percentage of the fund’s money gets invested in large caps.

Market-cap-weighted indices

A capitalisation-weighted index is a type of stock index where the influence component has on the price of the index is a reflection of its total market capitalisation. The companies with a higher market cap get a higher weighting in the index, and companies with a smaller market cap have less impact on the overall index’s performance.

Examples of market-cap-weighted indices include the S&P 500 and the NASDAQ composite.

How can companies increase their market capitalisation?

There are two methods for companies to increase their market cap, these are:

  1. Increasing the value of the share price. Market factors determine the value of a company’s share, so in order to increase share price a company will have to alter market sentiment. This is often achieved through above-expectations earnings announcements, positive news, strong management and a growth outlook
  2. Increasing the number of shares issued. The market cap should, in theory, rise if more shares are issued. However, this will depend on the overall market reaction to more public stock being in circulation. Example of how to do this include a stock split or new share issuance

Biggest companies by market capitalisation

The biggest companies by market share are also some of the most famous. A lot of the largest market caps are founded in the United States and traded primarily on US stock exchanges.

Here’s a list of the top ten companies by market cap as of June 14 2021.

1

Apple (AAPL)

$2.162 T

US

2

Microsoft (MSFT)

$1.943 T

US

3

Saudi Aramco (2222.SR)

$1.882 T

Saudi Arabia

4

Amazon (AMZN)

$1.697 T

US

5

Alphabet (GOOG)

$1.650 T

US

6

Facebook (FB)

$949.85 B

US

7

Tencent (TCEHY)

$736.28 B

China

8

Berkshire Hathaway

(BRK-A)

$649.73 B

US

9

Tesla (TSLA)

$594.75 B

US

10

Alibaba (BABA)

$577.40 B

China

If you want to trade the shares of the biggest companies by market cap, all you need to do is:

  1. Open a City Index account, or log in if you’re already a customer
  2. Search for the company you want to trade in our award-winning platform
  3. Choose your position and size, and your stop and limit levels
  4. Place the trade

Is market cap a measure of success?

Market cap is not a measure of success as a stand-alone metric. The size of a quoted firm is not necessarily representative of its success. Firms that haven’t registered profits or experiencing a downturn might have a large market cap relative to their peers.

Plus, shares are often over-or undervalued by the market, so the market price is only an indication of how much market participants are willing to pay for its shares, rather than its intrinsic value

We’d always recommend that you undergo a thorough analysis of a firm’s fundamentals to conclude if the company is successful.

Learn how to read a company earnings release.

Measurements such as the P/E ratio (price to earnings), P/B (price to book) and the latest earnings report show a level of success and should get used alongside the market cap.


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