Market capitalisation, often referred to as market cap, is a financial metric that tells you the total market value of a publicly traded company’s outstanding shares. In other words, it reflects the collective valuation that investors have placed on a company at any given time.
How Market Cap Is Calculated
Market Cap = Current Share Price x Number of Outstanding Shares
So, if a company has 1 million shares outstanding and each share is priced at £50, the company’s market cap would be £50 million.
There are a few key things to remember about market cap. First, it fluctuates with the stock price. As the stock price goes up or down, so does the market cap. This is because market cap reflects investor sentiment. A high market cap indicates that investors believe the company is valuable and has strong growth potential. Finally, market cap is a measure of company size. It’s a common way to categorise companies into large-cap, mid-cap, and small-cap based on their market value.
Market capitalisation is also used in ranking the relative size of stock exchanges, being a measure of the sum of the market capitalisations of all companies listed on each stock exchange.
Market Cap Estimates
The total market capitalisation of all publicly traded companies in the London Stock Exchange stood at approximately 3.6 trillion Great British Pounds as of July 2023.
In contrast, the New York Stock Exchange’s market cap as of February 2024 stood at 25.564 trillion U.S. dollars.
Frequently Asked Questions
What a High Market Cap Tells You
A high market cap suggests a company is large and well-established. So, a high market cap reflects a large number of outstanding shares trading at a high price, indicating widespread investor confidence and a significant presence in the market. These companies are often industry leaders with a proven track record.
Does Market Cap Affect Stock Price?
Market cap itself doesn’t directly affect stock price, but it’s a result of the stock price. Investors use market cap to assess a company’s overall size and value. A company with a high market cap might see smaller percentage changes in its stock price compared to a smaller company, simply because there are more shares outstanding to absorb any price movements.
Importance of Market Cap
Market cap is a key metric for investors. It gives a quick snapshot of a company’s size and relative value compared to its peers. It can also be a loose indicator of risk. Generally, large-cap companies with high market caps tend to be more stable and less volatile than smaller companies. This can be attractive to investors seeking lower-risk options, but it may also mean lower potential growth compared to smaller companies with lower market caps.
