Market capitalisation

    Market capitalisation (short: “market cap”) is the total market value of all shares of a public company.

    It is calculated by multiplying the number of outstanding shares by the share price and is thus a strong indicator of a company’s net worth. Market cap is generally expressed in US dollars but in Europe may be recorded in euro or pound sterling.

    As an example, a company that has 50 million shares with a share value of $75 would have a market cap of $3.75 billion (50 million x $75).

    The total (also: outstanding) shares include not just the free float but also preferred shares, which are not usually traded on the stock exchanges.

    Many online brokers offer the option to trade the stocks and shares of public companies:

    Why the market capitalisation in trading matters

    Market capitalisation is not the only indicator of a company’s value, but it is an important one as it’s a fairly solid calculation of the size of its equity, and this may be viewed as a sign of its success as a company.

    It should not be taken as the sole indicator of company’s health, as many factors can affect a company’s growth, some of which will be outside the control of the company or market sentiment.

    On the trading floor, companies are rated according to the size of their market capitalisation, which determines which indices they may be listed on. The amounts for listing are usually:

    • Large-cap companies have equity of at least $10 billion
    • Mid-cap companies have equity of $2-10 billion
    • Small cap companies have equity of less than $2 billion

    Cap size, therefore, matters when considering investing in or trading shares as it can depict how a company has allocated its assets and also help calculate the risk/reward ratio.