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Market capitalization, or market cap, is one way to understand the size of a public corporation. To find a company's market cap, you multiply the current share price by the number of outstanding shares—the shares that the public can trade and that employees and investment funds hold.
Investors often take a company's market cap into consideration when identifying new investments. Here's what to know about market capitalization and how to use it as you build your investment portfolio.
What Does Market Capitalization Mean?
A company's market cap is a dollar amount. For example, if a company has 25 million outstanding shares and a stock price of $20, it has a $5 billion market cap.
There are only two parts to the market cap equation, which can make the calculations fairly straightforward. You can also generally find a company's market cap listed alongside other basic information, such as the current share price, in stock-tracking apps and websites.
While the market cap represents a company's market value, sometimes called equity value, there are other ways to value a company. A company's enterprise value, for example, is its market cap plus its debt and minus its cash and cash equivalents. Enterprise value might be a better basis for a merger or acquisition because it takes assets and liabilities into account that aren't reflected in the company's market cap.
How to Use Market Capitalization
Market cap tells you the market value and relative size of a public corporation, which can be helpful when you're trying to build a diversified investment portfolio.
Using market cap, you could invest in a mixture of small companies with a lot of growth potential and large companies that are established industry leaders. You can also diversify your investments in different ways, such as investing in various asset classes (such as stocks and bonds) and industries. And diversification can help lower your overall risk, because even if one of your investments drops, the others might stay flat or rise.
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The Four Market Cap Ranges
Companies are sometimes categorized based on their market cap. The exact cutoff or range can vary depending on whom you ask, but here are four common groupings:
- Large-cap (over $10 billion): Large-cap companies may have a long track record of success and growth. These include many companies that are household names, and their size tends to make them a less-risky investment option than smaller companies.
- Mid-cap ($2 billion to $10 billion): Mid-cap companies may have a strong foothold in their market, but they're not necessarily well known. They could be the up-and-coming challengers with more growth potential than the established leaders.
- Small-cap ($250 million to $2 billion): Small-cap companies may be prominent players in small markets or small players in large markets. These can be high-risk-high-reward investments, as the companies have a lot of potential but might not wind up being a success.
- Micro-cap (under $250 million): Micro-cap companies are the smallest public companies. These can be especially risky as the company might not have the resources to withstand a setback.
What Is Float-Adjusted Market Capitalization?
The float-adjusted market cap or free-float market cap of a company is an alternative calculation that doesn't include all of the company's outstanding shares.
While the full-market cap can tell you the company's total equity value, some of those shares aren't available to the general investing public. These could include shares that governments, other companies and current employees hold. By excluding these from the calculation, the free-float adjusted market cap can give investors a better sense of how the market values a company.
Many indexes also use float-adjusted market caps, and these indexes are often the basis for mutual funds and exchange-traded funds (ETFs). Some of these funds also focus on a particular market cap range. For instance, the S&P 500 tracks 500 large-cap companies' stocks, but there are also S&P MidCap and SmallCap indexes. By buying an index fund based on one of these indexes, you could easily invest in hundreds of similarly sized companies.
Take a Calculated Approach to Your Finances
You may want to review a company's market caps and consider how it will fit with your overall portfolio before investing in its stock. Periodically reviewing and rebalancing your portfolio is also an important part of managing investments. If you don't want to do this on your own, you can look into investment funds, tools and advisors that can help.
Your investments are only one piece of your finances, though. Monitoring and maintaining your credit can be important as well. Use Experian's free tools to check your credit report and credit score and automatically get notified of important changes. You can also get matched with credit card and loan offers based on your credit profile.