Ben Gran, The Motley Fool
What makes a company big or small? There are lots of ways to measure the value and size of companies. But one of the most important ways is market cap.
What is market cap? It’s short for “market capitalization.” This is a fancy way of saying the overall size of a company’s estimated market value based on what investors are willing to pay for the company’s shares.
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Market cap is one of the most used and frequently discussed ways of measuring and understanding the value and size of a publicly traded company. When investors say that a company is a “billion-dollar company” or “trillion-dollar company,” they’re usually talking about market cap.
Learning more about how market cap works and why it matters for choosing stocks can help you be a better-informed investor. Let’s look at the big picture of market cap and see how it affects our investments.
What is market cap — and how is it calculated?
Market cap is a way of measuring the overall value of a publicly traded company. It shows investors the approximate size of a company based on share price and total shares being traded in the market. It’s one of the most useful metrics for estimating a company’s total value in dollars.
Market cap is calculated by taking the total number of a company’s shares outstanding and multiplying that figure by the price per share. As an example, if a company has 10 million shares of stock outstanding, and the stock price is trading at $100 per share, that company’s market cap is 10 million x $100, or $1 billion.
Market caps are constantly changing. Every time a company’s stock price goes up or down, the company’s market cap goes up or down with it. If a company issues new shares of stock (increasing the number of shares outstanding) or does a stock buyback (which reduces the number of shares outstanding), this also can affect the market cap.
Why market cap matters for investing
Investors follow share prices, price-to-earnings (P/E) ratios, analyst ratings, earnings estimates, and other metrics to try to understand the value of different stocks and decide which ones to buy. Market cap is a big-picture way of understanding how a stock fits into the larger investment universe. Grouping stocks of similar sizes and valuations together can help investors organize their portfolios.
