What is Market Capitalization?

Market capitalization, or "market cap," is how investors measure a company's size. Understanding it helps you build a balanced portfolio and assess investment risk. [DEFINITION] Market Capitalization: The total market value of a company's outstanding shares, calculated by multiplying stock price by shares outstanding. [FORMULA] Market Cap = Current Stock Price × Total Shares Outstanding ### Calculating Market Cap Let's see how this works in practice: [EXAMPLE] Apple has approximately 15.5 billion shares outstanding. If Apple trades at $180 per share: Market Cap = $180 × 15.5 billion = $2.79 trillion This makes Apple one of the world's most valuable companies. ### Market Cap Categories Companies are classified by size: **Mega-Cap (>$200 billion)** - Examples: Apple, Microsoft, Amazon, NVIDIA - Characteristics: Global dominance, stable, slow growth - Risk level: Lower **Large-Cap ($10-200 billion)** - Examples: Starbucks, Nike, FedEx, Target - Characteristics: Established leaders, reliable dividends - Risk level: Moderate-low **Mid-Cap ($2-10 billion)** - Examples: Crocs, Zillow, Dropbox - Characteristics: Growth potential, less stability - Risk level: Moderate **Small-Cap ($300M-2 billion)** - Examples: Many regional banks, emerging tech - Characteristics: High growth potential, volatile - Risk level: Higher **Micro-Cap (<$300 million)** - Examples: Penny stocks, early-stage companies - Characteristics: Speculative, illiquid - Risk level: Very high [TIP] A balanced portfolio often includes a mix of market caps. Large-caps provide stability while small/mid-caps offer growth potential. A common allocation: 60% large-cap, 30% mid-cap, 10% small-cap. ### Why Market Cap Matters Market cap affects investment characteristics: **Liquidity**: Larger companies trade more shares daily, making buying and selling easier. **Volatility**: Smaller companies often swing more dramatically on news. **Research Coverage**: Mega-caps have dozens of analysts; small-caps might have none. **Index Inclusion**: S&P 500 requires ~$14.5 billion minimum market cap. [KEY] Market cap is NOT the same as a company's "intrinsic value." A stock can have a high market cap but be overvalued, or a low market cap but be undervalued. It's simply what the market is willing to pay today. [EXERCISE] Company XYZ has 50 million shares outstanding and trades at $40 per share. What's its market cap, and how would you classify it? |ANSWER| Market Cap = 50 million × $40 = $2 billion. This is at the border of small-cap and mid-cap—typically classified as a small-cap on the higher end. [WARNING] Don't confuse market cap with revenue or profits. A company can have a $100 billion market cap but only $10 billion in revenue—investors are paying for expected future growth. This is why tech companies often trade at higher valuations. [SCENARIO] You have $10,000 to invest. Your advisor suggests: 70% in a large-cap index fund (stable), 20% in a mid-cap fund (balanced growth), and 10% in a small-cap fund (aggressive growth). This "pyramid" approach gives exposure to all sizes while managing risk.