What Is Market Cap? In Plain Words

The definition

Investor.gov, the U.S. Securities and Exchange Commission’s investor site, defines the term in one sentence: “Market capitalization is the value of a corporation determined by multiplying the current public market price of one share of the corporation by the number of total outstanding shares.” A corporation is a company.

FINRA defines it in a matching way. FINRA says: “Market capitalization, or market cap, is one measurement of a company’s size. It’s the total value of a company’s outstanding shares of stock, which include publicly traded shares plus restricted shares held by company officers and insiders.” Restricted shares are shares with limits on selling them. Insiders are people inside the company, such as its officers.

FINRA’s “Stocks” page says the same thing in shorter words: market cap is one measure of a company’s size, and, more specifically, it is the dollar value of the company, calculated by multiplying the number of outstanding shares by the current market price.

The formula

Both sources give the same sum, in a different order of words:

Market cap = number of shares outstanding × current price of one share

FINRA states it this way: “To calculate market cap, you take the total number of a company’s shares outstanding and multiply that figure by the company’s current stock price.”

Shares outstanding means the total shares counted in the sum. FINRA says that count includes publicly traded shares plus restricted shares held by company officers and insiders.

Worked examples, from FINRA

Investor.gov’s market capitalization entry gives no worked number example. FINRA does. Both examples below are FINRA’s own, from its page “Market Cap Explained.”

Put in plain steps, using FINRA’s numbers only: 5 million times $20 equals $100 million. And $50 times 5 million equals $250 million, while $50 times 5 billion equals $250 billion.

Share price alone does not show size

FINRA warns about a common mistake. FINRA says: “Newer investors might mistakenly believe that stock price alone could be a good indicator of how large a company is, but what’s most important in determining a company’s size is the number of shares outstanding.”

FINRA’s Company A and Company B example above shows why. Both stocks trade at $50 a share, but the two companies have very different market caps, because they have very different numbers of shares outstanding.

Size bands, from FINRA’s “Market Cap Explained” page

Companies are often described as large-cap, mid-cap, or small-cap. Cap is short for capitalization. FINRA’s “Market Cap Explained” page says: “The delineation between each group can vary, but generally, you’ll see them broken down like this”:

• Mega-cap: market value of $200 billion or more;
• Large-cap: market value between $10 billion and $200 billion;
• Mid-cap: market value between $2 billion and $10 billion;
• Small-cap: market value between $250 million and $2 billion; and
• Micro-cap: market value of less than $250 million.

Note FINRA’s own words on that page: the line between each group can vary. The list above is how FINRA says you will generally see them broken down. It is not stated as a fixed rule.

Size bands, from FINRA’s “Stocks” page — stated separately

FINRA’s “Stocks” page describes the bands differently, and this page does not merge the two versions. That page says: “There are no fixed cutoff points for large-, mid- or small-cap companies, but you might see a small-cap company valued at less than $2 billion, mid-cap companies between $2 billion and $10 billion, and large-cap companies over $10 billion—or the numbers might be twice those amounts.”

That page gives no dollar figure for mega-cap, and it gives no dollar figure for micro-cap. It says only that you might also hear about micro-cap companies, which are even smaller than other small-cap companies.

So the two FINRA pages do not state the bands in the same way. The “Market Cap Explained” page lists five bands with figures, including a top figure for large-cap and a bottom figure for small-cap. The “Stocks” page lists three bands, sets no top figure for large-cap and no bottom figure for small-cap, and stresses that there are no fixed cutoff points. Both versions are printed above, each under its own page name, just as the sources state them.

Size bands, from Investor.gov — stated separately

Investor.gov’s “Market Capitalization” entry gives no size bands at all. It gives only the definition quoted at the top of this page. For large-cap, mid-cap, and small-cap bands, this page rests on the FINRA pages above, because Investor.gov gives none.

Investor.gov does give figures for the smallest companies, in a different document: its “Investor Bulletin: Microcap Stock Basics (Part 1 of 3: General Information).” That bulletin says: “Companies with a market capitalization of less than $250 or $300 million are often called ‘microcap stocks’ – although many have market capitalizations of far less than those amounts.” It also says: “The smallest public companies, with market capitalizations of less than $50 million, are sometimes referred to as ‘nanocap stocks.’” The bulletin says it uses the term “microcap stock” to refer to both microcap stocks and nanocap stocks.

How indexes and funds use market cap

FINRA’s “Market Cap Explained” page says certain stock indexes or investment funds will use this measure to group companies together by size. An index is a set list of stocks used to track a part of the market. A fund is a pool of money invested together.

FINRA gives two index examples on that page. It says the S&P 500 is made up of mega-cap and large-cap stocks and is weighed by market cap, so companies with a higher market cap account for relatively more of the index than companies with a comparatively smaller market cap. It also says the Russell 2000 Index is a small-cap stock market index. S&P 500 and Russell 2000 are the index names FINRA itself uses on that page.

Why market cap matters, in FINRA’s words

FINRA says market cap can give you a general idea of where a company stands in the business development process. FINRA asks, as its own example: is it a relatively new public company? If so, FINRA says, it might have room for growth. FINRA adds that access to investor capital to expand the business is why many companies decide to go public in the first place. To go public means to sell shares to the public for the first time. Capital, in that sentence, means money raised from investors.

FINRA also says market cap can provide a rough gauge of a company’s stability. Stability means how steady a company is. FINRA states the general pattern this way: “Large-cap companies tend to be less vulnerable to the ups and downs of the market than mid-cap companies, and mid-cap companies are generally less susceptible to volatility than small-cap companies.” Volatility means the size and frequency of price movements. FINRA’s “Stocks” page defines it that way: the size and frequency of price fluctuations are known as the stock’s volatility.

FINRA explains part of the reason in general terms: larger companies typically have greater financial reserves, and therefore often can absorb losses more easily and bounce back more quickly from a bad year. FINRA also states, in general terms, that smaller companies might have greater potential for fast growth in economic boom times than larger companies. A boom time is a period when the economy is doing well.

FINRA also says market cap can be a useful gauge particularly when it comes to diversifying your portfolio. A portfolio is the set of investments a person holds. To diversify means to spread investments out to manage risk. FINRA says you can diversify within one asset class, and gives investing in small-cap and large-cap stocks as one example of diversifying within one asset class (stocks). An asset class is a broad type of investment, such as stocks or bonds.

The limitations of market cap

Extra cautions for the smallest companies

Investor.gov’s microcap bulletin explains how microcap stocks differ from other stocks. It says often the biggest difference is the amount of reliable publicly available information about the company. It says most large public companies file reports with the SEC that any investor can get for free from the SEC’s website, professional stock analysts regularly research and write about larger public companies, and it is easy to find their stock prices. In contrast, it says, the same information about microcap companies can be extremely difficult to find, making them more vulnerable to investment fraud schemes and making it less likely that quoted prices will be based on full and accurate information about the company.

The bulletin also says microcap stocks are among the most risky. It says many microcap companies are new and have no proven track record, some have no assets, operations, or revenues, and others have products and services that are still in development or have yet to be tested in the market. Assets are things a company owns. Revenues are the money a company takes in from sales. It adds that low volumes of trades may make it difficult to sell shares when you want to do so, that any size trade can have a large percentage impact on the price of a stock that trades in low volumes, and that microcap stocks may also be susceptible to fraud and manipulation. Manipulation means dishonest action to move a price.

FINRA’s “Stocks” page gives a matching warning in its penny stock section. It says microcap securities, sometimes referred to as penny stocks, include low-priced securities issued by small companies with low market capitalization. A security is an investment asset such as a stock. It says that, even in the absence of fraud, microcap stocks can present higher risks than the stock of larger companies, largely because relatively little information is available about microcap companies compared with larger companies that list their securities on national exchanges.

What this page does not cover

No source read for this page states a number that counts as a “good” market cap, and no source states a cut-off number above or below which a stock is a buy or a sell. This page states no such rule, because the sources do not.

The official pages read in full for this page give no single fixed set of size bands that all sources agree on. FINRA itself states the bands two different ways on its two pages, and Investor.gov gives no large-cap, mid-cap, or small-cap bands at all. That is why this page prints each source’s bands separately.

This page does not pick stocks, does not name any real company as an example, and does not say what any stock price will do next.

Words to know

Market capitalization (market cap): The value of a corporation determined by multiplying the current public market price of one share of the corporation by the number of total outstanding shares. FINRA also describes it as one measurement of a company’s size, and as the total value of a company’s outstanding shares of stock.

Shares outstanding: The shares counted in the market cap sum. FINRA says the total includes publicly traded shares plus restricted shares held by company officers and insiders.

Large-cap, mid-cap, small-cap: Size labels based on market cap. The figures differ by source on this page: see the FINRA “Market Cap Explained” list and the separate FINRA “Stocks” description above. Neither list is merged with the other.

Mega-cap: In FINRA’s “Market Cap Explained” list, market value of $200 billion or more. FINRA’s “Stocks” page gives no mega-cap figure.

Micro-cap / microcap: In FINRA’s “Market Cap Explained” list, market value of less than $250 million. In Investor.gov’s microcap bulletin, companies with a market capitalization of less than $250 or $300 million are often called microcap stocks.

Nanocap: In Investor.gov’s microcap bulletin only, the smallest public companies, with market capitalizations of less than $50 million, sometimes referred to as nanocap stocks.

Index: A set list of stocks used to track a part of the market. FINRA says certain stock indexes will use market cap to group companies together by size.

Volatility: The size and frequency of price fluctuations, in FINRA’s “Stocks” page wording.

This page is general information only. It is not financial advice.