When you start investing, you’ll come across a lot of phrases that won’t mean much to you. One of them is market cap. This is an important term that you should pay attention to.
So what is market cap? Read on to find out…
What is market cap?
Market capitalisation, or market cap, is the total market value of a company’s outstanding shares of stock.
It’s normally used by investors and professionals to work out a company’s size. It’s often a better indication than sales or total asset figures. Also, when one firm buys another, market cap is often used to establish whether a firm is good value or not to the purchaser.
How to calculate market cap
Calculating a company’s market cap is very simple. You multiply the total number of the company’s outstanding shares by the current price of one single share.
For example, if a company has 5m outstanding shares worth £200 each, the company’s market cap would be £1bn.
Market capitalisation categories
| Type of stock | Market capitalisation range (£) |
| Large cap | 7.9bn+ |
| Mid cap | 1.58bn to 7.9bn |
| Small cap | 237m to 1.58bn |
| Micro cap | 39.5m to 237m |
Large cap
Large-cap companies are some of the biggest listed companies out there. In the UK you’ll find these on the FTSE 100 index.
These companies tend to be well established and are therefore often viewed as strong investment opportunities. They often have a proven track record of performing well in their sector and beating the competition.
Large-caps stocks often prove to be the best dividend stocks too. This is because they tend to have larger revenues than they need to invest in the business, so they return the rest of the cash to shareholders in the form of dividend payments.
Examples of UK large-cap companies are:
Mid cap
With market caps between £1.58bn and £7.9bn, mid-cap companies aren’t quite as secure or established as large caps, but still tend to be seen as a fairly safe investment.
Mid-cap companies might be ‘up-and-coming’. They may well be in the process of increasing their market share and becoming more competitive. It’s not unusual for mid-cap firms to become large caps.
The mid-cap stage is crucial – it will likely determine whether a company is going to go on to become a large-cap stock or whether it will falter.
If you’re looking for growth opportunities, mid-cap stocks may prove a good option. They tend to have more growth potential than large-cap stocks, which have usually been through the growth stage already.
Examples of mid-cap companies are:
- Morrisons (LSE:MRW)
- Gamesys Group (LSE:GYS)
Small cap
Valued at between £237m and £1.58bn, small-cap companies are a lot smaller than large caps and a bit smaller than mid caps.
Small-cap stocks can outperform larger stocks, but they also come with more risk and can be more volatile investments.
As they are small, they can react to changes quickly, and are often adaptable. However, they can lack the security – and balance sheet strength – of their larger counterparts.
Some well-known small-cap companies are:
- Sanne Group (LSE:SNN)
- Spire Healthcare (LSE:SPI)
Micro cap
These are some of the smallest companies out there. Micro-cap companies are usually penny stocks.
These companies are often in the very early stages of development. Some may not even have brought their products to market yet.
There is clearly a huge amount of potential in these companies if they succeed, but the opposite is also true if they fail. As a result, investments in micro-cap stocks are considered risky and may require a lot more research.
You may not have heard of many micro-cap companies, but here are some examples:
- Tribal Group (LSE:TRB)
- Trans-Siberian Gold (LSE:TSR)
What impacts a company’s market cap?
Market cap is calculated by multiplying the single share price of a company by its total number of shares. Therefore, these are the two factors that impact a company’s market cap.
Share price has the biggest impact on a company’s market cap. If a company performs well and its share price increases, so too will its market cap.
Both internal and external factors can impact a company’s share price. If there is an economic downturn and negative market performance, many companies’ share prices will fall. Equally, if a company has bad press or makes a bad investment, its share price could fall regardless of the overall market.
The reverse is also true – internal and external factors can also have a positive impact on a company’s share price.
Equally, if a firm issues more shares, its market cap could increase – as long as the share price doesn’t decline!
Firms often issue more shares when they are looking to raise funds for transformation projects or deals. This could lead to an increase in market cap.
How to use market cap when researching stocks
Market cap can be a useful tool when researching stocks. Some investors mistakenly take a company’s share price as an accurate representation of its value and stability. This can trick people into thinking a lower share price means an investment is a bargain or a high share price means the company is very stable.
Share price is not an accurate representation of a company’s value. Different companies have different numbers of shares issued, so comparing share prices doesn’t always give an accurate picture.
For example, as of July 2022, Apple’s (AAPL) share price is $147.47, but it has a market cap of $2.56trn. However, Berkshire Hathaway’s (BRK.B) share price is much higher at $316.80, but its market cap is far lower than Apple’s at $698.52bn.
As market cap takes into account share price and the total number of shares, it is a much better indicator, so is far more useful when researching stocks.