What is Market Cap?

Jun 19, 2018 | BEGINNER, INVESTING 101

Market cap, short for market capitalization, is the total market value of all of a company’s outstanding shares. Market cap is calculated by multiplying the current share price by the number of outstanding shares.

Many investors mistake the market cap for a company’s worth or value, but really it is a better indicator of a company’s size and current price based on share price which – as every investor knows – can fluctuate wildly.

Knowing the size of a company is beneficial for numerous reasons, especially in determining risk. Larger companies tend to be more stable and less volatile than their smaller counterparts.

Depending on your investment strategy, you may need to use market cap to help determine if a particular investment is a good fit for you. Large-cap stocks, which have high market caps, are more stable and tend to provide long-term returns, but will not likely give you quick, large profits. Medium and small-cap stocks carry more risk but provide opportunity to make quicker turnarounds.

For the average investor market cap is sufficient to determine whether the stock is a good purchase option. But if you want to know what a company is actually worth, you need to dig deeper.

To determine a company’s true worth or value, the enterprise value (EV) is a better tool.

The enterprise value is the market cap plus debt, minority interest, and preferred shares, and minus total cash and cash equivalents.