Market capitalization is the total dollar value of a company’s stock shares. To calculate it, we multiply the total number of shares outstanding (aka the amount of stock currently held by shareholders) by the current stock price.
We use market capitalization to assign a dollar value to a company’s share of the market. It tells us very quickly information about a company’s size and stock market share. The more shares outstanding and the higher the stock price tells us how much has been invested in the company and the company’s current “value” to the market.
It’s kind of like looking at someone’s number of Insta followers vs. how many posts they’ve made. Posts are like shares outstanding: how much content are they putting out? Number of followers is like stock price. How much does the Insta market value this account with a follow?
(We’re not saying an Insta follower number signifies a person’s value in general. It doesn’t.)
For more on stock and shares, read up on these articles:
Large, Mid and Small Cap
In the finance world, we roughly divide companies between 3 market capitalization categories: large, mid and small-cap.
It works exactly how you think it does. Companies with large market caps go into the large bucket, mid to the mid-sized bucket, and small-cap to the small bucket.
The important thing for you to know is what investors define as large, mid or small capitalizations.
Large: Over $10 billion market cap. Sometimes called blue-chip stocks.
Mid: Between $2 billion and $10 billion market cap
Small: Between $300 million and $2 billion market cap
Bet you never thought $300 million of anything could be considered small, did you?
Applying Market Capitalization in the Real World
Say you’re reading an article about Amazon becoming the second trillion-dollar valued company. (Can you guess the first?)
After you’re done considering how crazy an amount a trillion dollars is, you think: How did they value the company at a trillion?
By valued company, the article’s talking about market cap. Ba-da-boom!
~ Sound of brain waves firing~
Based on Amazon’s share price and the number of shares it has issued, the company’s market cap reached over one trillion dollars.
Size Isn’t Everything
A large market capitalization does not always equal large company.
Theoretically, if a company has a super high stock price but only a couple thousand shares outstanding, its market cap could be equal to a company with a lower stock price but more outstanding shares.
Example time. #mathisfun
Cat Company has a stock price of $2,000 and 1 million shares outstanding
Dog Company has a stock price of $200 and 10 million shares outstanding.
$2,000 x 1 million shares = 2 billion
$200 x 10 million shares = 2 billion
Same market cap, very different stock prices.
Market Capitalization is a Mood…It fluctuates
Stock prices change daily. We know this. It’s why day-traders spend hours glued to their computer screens.
Since stock price is used to calculate market cap, market cap changes whenever stock price does. Depending on how many shares outstanding there are, a single-digit percentage increase or decrease probably won’t change the number very much.
But since share price factors into market capitalization, you can see how a company can lose value or gain value very quickly as the stock price moves.
Shares outstanding also can change. When companies raise capital by selling stock, shares outstanding increases. If they buy back shares, the number of shares outstanding decreases.
You can find a company’s shares outstanding information at the bottom of a company’s balance sheet, under the line item “share holder’s equity.” If you’re using Yahoo Finance, it’s under the “Share Statistics” column.
RECAP
Market Capitalization: Dollar value of a company’s outstanding shares. Aka how much the market values a company
Three tiers: Large, mid, and small-cap. Large is over $10 billion, small is below $2 billion
Used simultaneously in financial and news speak with the word “value,” “worth, and “market price,” among other terms.
