---
title: "What is Market Capitalization?"
description: "What is market capitalization? The size and popularity of a stock influences whether it's worth investing in right now."
canonical_url: https://trendshare.org/how-to-invest/what-is-market-capitalization
markdown_url: https://trendshare.org/ai/what-is-market-capitalization.md
published: 2015-04-26
last_updated: 2018-01-29
content_license: https://trendshare.org/about/disclaimer
---
# What is Market Capitalization?

Source: https://trendshare.org/how-to-invest/what-is-market-capitalization
Updated: 2018-01-29
Every investment has risk and every investment has potential reward. While
no one can predict the future with accuracy, clever investors can restrict the
possibilities by measuring specific financial attributes of stocks. For
example, a small company may have a lot of room to grow but fewer opportunities
to recover from slow years, whereas a large company may need to make more money
by cutting expenses or expanding into new markets.

## What is Market Capitalization?

Market capitalization is a measurement of the current value of the company's
outstanding shares on the stock market. In other words, market cap measure how
much money you'd have to spend *right now* to own all of the public
stock of a company. It's an artificial question in a couple of ways—[not all of the possible shares may be for sale right now](https://trendshare.org/how-to-invest/what-is-liquidity), and certainly buying all that many shares would push the price
up—but it's an interesting measurement of investor sentiment as well as
the company's size.

To calculate market capitalization, multiple the current price per stock by
the total number of outstanding stocks. For a Canadian lumber company selling
at $48 per share, with 100,000,000 shares outstanding, you get a market cap of
$4.8 billion. This number can and will fluctuate: if the price goes up to $50
per share tomorrow, the market cap will be a round $5 billion.

Keep in mind that some stocks, famously [Google](/stocks/GOOG/view) and [Facebook](/stocks/FB/view)
have a majority of shares held privately by their founders. (This is often done
to control voting rights for the board of directors.) For a true cap
calculation, you should take this into account. It's public information, after
all.

## What Factors Affect Market Cap?

Because capitalization depends on the combination of stock price
*and* number of outstanding shares, it's less susceptible to
manipulation than stock price, [dividend yield](https://trendshare.org/how-to-invest/what-is-dividend-yield), or other financial measurements. A business which performs a [stock buyback](https://trendshare.org/how-to-invest/why-do-companies-perform-stock-buybacks) to reduce the
number of shares outstanding tends to see its share price rise—and, thus,
its market cap stay stable.

Like the [P/E ratio](https://trendshare.org/how-to-invest/what-is-the-pe-ratio), market cap can give
you a sense of how the market as a whole views a stock, especially in
comparison to companies with similar sizes—not size in the cap
measurement, but number of employees, customers, amount of earnings and profit,
and so on.

## What does Market Cap Mean?

Tracking market cap allows you to group stocks of similar sizes together.
For example, a large-cap stock ([$10 billion or more is a large-cap stock](https://www.investopedia.com/terms/m/marketcapitalization.asp)) is likely a member of the [S&P 500](https://trendshare.org/how-to-invest/buy-the-s&p-index-fund), if not the [Dow Jones](https://trendshare.org/how-to-invest/dow-sandp-nasdaq) IA. These companies tend to be stable and
can weather economic troubles to come out ahead.

A small-cap stock may be worth a few hundred million dollars, but this may
also offer some nimbleness. There's a lot more room for a small business to
grow into its market segment (especially if it's new). In other words, [Coca-Cola](/stocks/KO/view) won't grow ten times larger by selling
more Coca-Coca, whereas [Nautilus](/stocks/NLS/view) could grow ten
times larger by selling more exercise equipment or accessories.

There's a relationship between company size and market risk. Because
investor sentiment affects the stock price (due to [earnings](https://trendshare.org/how-to-invest/earnings-matter-most), [free cash flow calculations](https://trendshare.org/how-to-invest/what-is-free-cash-flow), [intrinsic value](https://trendshare.org/how-to-invest/what-is-intrinsic-value), etc), you'll see some investors rush toward small and micro-cap
stocks while others stick with the tried and true blue chips.

When a stock's price takes a dive (and the company hasn't issued a
tremendous amount of new stock, diluting the existing pool), the business is
probably in trouble.  At least, enough investors believe that to be true, that
sellers outnumber buyers. While it's rare for a stock to jump between levels of
the market cap chart, you'll often see companies with debt problems or
bankruptcy enter [penny stock territory](https://trendshare.org/how-to-invest/should-you-buy-penny-stocks). While the technical definition of penny stocks has more to do
with price than capitalization, their link is obvious.

## Should Value Investors Pay Attention to Market Capitalization?

What does this mean for value investors?

There's more risk in investing in small cap stocks, because of their size,
but there are also more opportunities. Large, institutional investors don't pay
much attention to smaller stocks, partly because there are too many to analyze
and partly because they're prohibited by law from owning too much of any one
stock.

That can leave a lot of great stocks relatively unstudied and untouched.

If you limit your research to stocks worth less than a couple of hundred
million dollars (and avoid penny stock territory), you can find many great
companies with good products and services and the potential to grow much, much
larger. Sometimes these stocks are on sale too.

Of course, mid- and large-cap stocks are sometimes bargains. Sometimes
market sentiment turns on a stock for no good financial reason, and you can
double or triple your money in short order. Yet this is an ideal situation: a
stable business available at deep discount.

Use market capitalization as a filtering tool to find overlooked stocks.
It's not the be-all, end-all of stock calculations or figures, but it's a good
way to categorize businesses and winnow down the possibilities until you find
those hidden gems in the market.