What is Market Capitalization?

In finance, a company's market capitalization refers to its total value, as measured by its stock. Market capitalization, or market cap for short, is equal to the price of one share of stock, multiplied by the number of shares in existence. For example, if the XYZ company has 15 million shares of stock, each valued at $7.50 U.S. Dollars (USD) per share, then XYZ's market capitalization is $112.5 million USD. Investors use this value as one way to determine the value of a company. Of course, this value fluctuates from day to day, and from moment to moment during trading hours, as the price of the stock changes.

Most of the time, market capitalization is divided into three broad categories. "Large cap" companies are those with a market cap of anywhere from $10 billion to $200 billion USD. Mid cap companies are those worth $2 billion to $10 billion USD, and those that trade as a whole between $300 million and $2 billion USD are in the small cap range.

Sometimes, additional categories are needed, like "mega cap," for those rare companies with a value of more than $200 billion USD. On the other end of the spectrum, the term "micro cap" describes corporations with $50 million to $300 million USD in value, and nano cap companies are worth the least, at under $50 million USD. Often, micro cap and nano cap companies are those whose stocks are relatively unregulated because they are worth so little, and not widely known.

While the ranges and definitions described above are generally agreed upon, they can also be stretched somewhat, partly because the market capitalization of every publicly traded company is in constant change. Also, inflation and the long-term historical upward trend of stock prices lead to the need for the definitions of market cap categories to be updated every so often. Individual countries also have their own ideas of what constitutes a large or small market capitalization.

It is common for mutual funds and other institutional investors to limit themselves to companies in one range of market capitalization. For example, a mutual fund may market itself as a small cap fund, and another as a large cap fund. Funds do this in an effort to take advantage of the different attributes that different levels of market cap have. A large cap fund may be seen as being stable, since the companies that it consists of are likely older, dependable, household names with good reputations. On the other hand, a fund with mainly small cap holdings may try to position itself for growth as its companies ideally increase in value.