Market capitalisation

Definition

Market capitalisation, often abbreviated as “market cap,” is a financial metric used to evaluate the size or value of a publicly traded company.

What is market capitalisation?

Market capitalisation is calculated by multiplying the current market price of a company’s outstanding shares of stock by the total number of those shares.

In simple terms, it represents the total value of a company’s equity in the stock market. Companies with higher market capitalisations are generally considered larger and more established in comparison to those with lower market caps.

Market capitalisation is often used to categorise companies into different size classes, such as large-cap, mid-cap, and small-cap. These classifications help investors and analysts assess the risk and growth potential of different investment opportunities.

It’s important to note that market capitalisation is just one factor to consider when evaluating a company’s investment potential, and it should be used in conjunction with other financial metrics and analysis.

Example of market capitalisation

Company XYZ has 1 million shares outstanding, and its current stock price is $50 per share.

To calculate the market capitalisation of Company XYZ, you use the formula:

Market capitalisation = Number of shares outstanding × Stock price

Market capitalisation = 1,000,000 shares × $50 per share = $50,000,000

In this example, the market capitalisation of Company XYZ is $50 million. This means that the total value of all outstanding shares of Company XYZ, as determined by the stock market, is $50 million.