What is Market Capitalization?
Market capitalization, often called “market cap,” is the total value of a company's shares of stock. Think of it as the price you would pay to buy the entire company at its current market price. It is a more accurate measure of a company's size and value than its stock price alone, because it accounts for both the price of a single share and the total number of shares available.
How It Works
The calculation for market cap is simple: Market Cap = Current Share Price × Total Number of Outstanding Shares.
Let's use Walmart (WMT) as an example. If WMT's stock price is $118.25 and the company has approximately 2.7 billion shares outstanding, its market cap would be calculated as follows:
$118.25 (Share Price) × 2,700,000,000 (Shares) = $319,275,000,000
This means Walmart's market cap is over $319 billion. This is why a company with a $500 stock price but only 1 million shares is much smaller than a company like WMT with a lower stock price but billions of shares.
Why It Matters for Investors
Market cap helps investors quickly understand a company's size, which often correlates with its risk and growth potential. Companies are generally grouped into three main categories:
- Large-Cap (over $10 billion): These are typically well-established, stable companies like WMT. They are often leaders in their industries and may pay dividends, offering slower but more reliable growth.
- Mid-Cap ($2 billion to $10 billion): These companies are in a growth phase and may offer a balance of the stability of large-caps and the growth potential of small-caps.
- Small-Cap (under $2 billion): These are smaller, often younger companies with high growth potential but also higher risk.
Understanding these categories helps you build a diversified portfolio that matches your risk tolerance. You can build a portfolio with a mix of company sizes when you Start Investing with SoFi Today.
Key Takeaways
- Market capitalization is the total market value of a company, found by multiplying the share price by the number of outstanding shares.
- It is a more reliable indicator of a company's size and value than the stock price alone.
- Investors use market cap to classify companies (large-cap, mid-cap, small-cap) to assess risk and potential returns.
- A company's market cap can influence investment strategy, helping you to diversify and align your portfolio with your financial goals. For a deeper look into a large-cap stock, see this WMT Analysis.
Content is for info only; not financial advice.