Market capitalization - also called market cap – is a number that describes the amount of money a company is worth on the open market. To figure market cap, multiply a company’s share price by the number of shares available to the public (i.e., the number of outstanding shares). For example:
- If Company Z has 20,000,000 outstanding shares and the current share price is $100 ($100 for one share of Company Z stock), the market cap for Company Z is $2 billion.
- We figure with the following calculation: 20,000,000 X $100 = $2,000,000,000
People in the financial industry often group companies into three major categories based on the amount the companies are worth. There is some variation among financial experts regarding the exact range for each category, but this is a general breakdown of the major categories of companies by market capitalization:
- large cap (large capitalization) = $5 billion or more
- mid cap (mid capitalization) = $1 billion to $5 billion
- small cap (small capitalization) = less than $1 billion
In the initial example, Company Z is considered a mid-cap company.
The real-world use for these categories is to diversify your investments across these (and other) asset classes based on your investment type. You may see large-cap growth or small-cap value in the names of investments. When you see this information, you will know the cap refers to the general size of the companies included in the fund.
Head over to Financial Engines to deeper look at market capitalization.