Introduction to Market Capitalization

By Hrishikesh Menon. Edited by Arjun Chandrasekar.

Overview

Market capitalization, or market cap for short, is the total dollar amount of a company’s outstanding shares. There are 3 main types of market cap (large, mid, and small).

What is Market Cap?

Market cap is the market value of the company’s equity and it’s calculated by multiplying the amount of outstanding shares by the share price. For example: Apple (AAPL) has $16.69 billion outstanding shares and its current share price is $133.11. The market cap would be $16.69 billion times $133.11 which is approximately $2.2 trillion, making Apple the largest public company in the world in terms of market cap. Investors use market cap as a metric to determine the market size of a company. There is a clear distinction between market value and equity value as market value is just what the company is valued at in the market but equity value is determined through the company’s fundamentals (ie. revenue, income, cost basis, cashflows, etc). Investors use market cap to compare the market value of said company to the equity value of it which allows them to determine whether the company is overvalued or undervalued.

Types of Market Cap

There are 3 main market cap categories: large-cap, mid-cap, and small-cap (these 3 categories may further be divided into subcategories depending on the investor). Large-cap companies are companies which have a market cap of $10 billion or more. Some examples of companies which fall under this category are Apple ($2.2 trillion), Microsoft ($2.0 trillion), Amazon ($1.72 trillion), and Walmart ($388.18 billion). Next, there are mid-cap companies which are companies with a market cap between $2 billion and $10 billion. Some examples of mid-cap stocks are: Assurant Inc. ($9.3 billion), Kimco Realty Corp ($8.85 billion), and Alaska Air Group Inc. ($7.68 billion). Finally, small cap companies fall anywhere below $2 billion. Some examples are: Axcelis Technologies Inc. ($1.38 billion), Cerus Corporation ($965.71 million), and Zix Corporation ($404.20 million).  Large-cap stocks are also called “blue chips”  since they have huge market share and are known for strong fundamentals and consistent returns to their shareholders, which sets up perfect conditions for long term investors. Mid-cap and small-cap stocks tend to trade at smaller prices and have higher volatilities depending on their relative volume, making them optimal for short term traders. Many mid-cap and small-cap companies can be undervalued due to recent IPO or any type of revamp in fundamentals which could change the valuation of the company. Therefore, if fundamentally analyzed correctly, such companies can be great for long term investors because they can enjoy great potential returns and be able to buy a lot more shares due to the cheap price.

Conclusion

To sum up, market cap is the market value of a company, which is different from the equity value. There are 3 types of market caps: large-cap (>$10 billion), mid-cap (between $2 billion and $10 billion), and small-cap (<$2 billion). Large-cap companies are strong in fundamentals and give consistent returns and dividends. Mid and small-cap companies are cheap, undervalued, and volatile. We hope this article helped in any way and if you’d like to learn more about business and finance, be sure to check out the other articles!

Related Posts

Leave a Reply