Market capitalisation, often referred to as market cap, is the total value of a company's outstanding shares of stock. It is calculated by multiplying the company's share price by its total number of outstanding shares. Market cap provides a quick and easy way for investors to determine a company's size and the aggregate value that the market places on its equity. Companies are typically categorised into different groups based on their market cap: large-cap (over $10bn), mid-cap ($2bn to $10bn), and small-cap ($300m to $2bn), with variations in these ranges depending on the market and the analyst.
The importance of market capitalisation lies in its use as a fundamental metric in the investment decision-making process. It offers investors a snapshot of a company's size and a basis for comparison with other companies in the same industry or sector. Market cap is also indicative of a company's risk profile: large-cap companies are usually considered more stable and less risky, while small-cap companies can offer higher growth potential but with increased volatility and risk. Furthermore, market cap influences a company's weighting in market indices, which in turn affects how index funds and exchange-traded funds (ETFs) allocate their assets.
However, while market cap is a useful tool for assessing company size and comparison, it does not provide a complete picture of a company's financial health or future performance potential. A company's market cap can be influenced by external market forces and investor sentiment, sometimes leading to overvaluation or undervaluation. Investors should therefore consider market cap alongside other financial metrics and qualitative factors, such as earnings growth, debt levels and industry trends, when evaluating investment opportunities.
This Trustnet Learn article was written with assistance from artificial intelligence (AI). For more information, please visit our AI Statement.