Market Capitalization: What It Is and Why It Matters - NerdWallet (2024)

What is market capitalization?

Market capitalization, or market cap, is the total value of a company’s shares of stock. If a company has issued 10 million shares, and its share price is $100, its market cap is $1 billion.

Market cap is calculated by multiplying the number of stock shares outstanding by the current share price. Shares outstanding includes all shares — those available to the public as well as restricted shares available to and held by specific groups.

What does market cap mean?

Market cap is a metric that makes it easier to understand a company's financial scope. It allows investors to size up a company based on how valuable the public perceives it to be. The higher the value, the "bigger" the company. The size and value of a company can inform the level of risk you might expect when investing in its stock, as well as how much your investment might return over time.

Public companies are grouped by size based on their market capitalizations:

Categorizing companies this way helps investors create a balanced portfolio that's optimized for long-term growth.

Below is a deeper dive into the major market-cap segments, but it’s important to remember the threshold isn’t clearly defined; the higher-value components of one segment can mix in with the lower-value segments of the next. Indexes and fund managers may have different definitions of market cap or use wider or narrower criteria. A company’s share price can also fluctuate enough to move it into a higher or lower market-cap category.

Market cap segments

Large-cap companies: $10 billion or more

Large-cap companies tend to be those that are well-established and profitable, and are often household names, including:

Because they’re so established, large-cap companies are generally more stable. They’re reliable in terms of dividend payouts and typically don’t grab headlines the way some flashier stocks might. But this understated nature is actually what makes them attractive to investors —large-cap stocks are boring, which means they don't often fluctuate as wildly as small- or mid-cap stocks.

There are several mutual funds that track large-cap stocks, including iShares S&P 100 ETF, Vanguard Value ETF and Schwab U.S. Large-Cap Value ETF. Many brokerages offer tools to screen and discover more funds that track companies with specific market capitalizations.

Mid-cap companies: $2 billion to $10 billion

While large-cap companies have already seen rapid growth, mid-cap companies are often in the midst of it. And with that growth comes the opportunity for higher, faster gains but also the potential for more drastic downturns. Mid-cap companies are often household names, too, but typically aren’t national — or international — behemoths like the companies above. A few mid-cap stocks include:

Small-cap companies: $250 million to $2 billion

Small-cap stocks are often young companies with the potential for high growth. These stocks may have the possibility of high returns (that small-cap could indeed grow to be a mid- or large-cap), but they also come with the possibility of significant losses.

Small-cap companies typically have only a few revenue streams, depend on overall U.S. economic growth and can feel the effects of taxes and regulations more profoundly than established businesses. If large-caps are the big cruise liners that can withstand the stormiest seas, small-caps are the sailboats that can be rocked by a single wave.

Still, the opportunity for growth they present can benefit an investor’s portfolio, provided the potential downside is buoyed by the relative stability of large-cap stocks. Examples of small-cap stocks include:

The Russell 2000 Index tracks small-cap companies including all of the above. There are several funds that track the Russell 2000, such as iShares Russell 2000 ETF and Vanguard Russell 2000 ETF.

Micro- and mega-cap companies

There are two other market-cap categories, generally referred to as micro-cap (below $250 million) and mega-cap (the largest companies on the stock market, some of which overlap with large-cap).

Micro-cap stocks are considered some of the riskiest investments. Many have virtually zero track record, and it’s possible they don’t even have any assets, operations or revenue to report. Mega-caps, meanwhile, represent the most established companies that often have large cash reserves that may help them weather economic downturns.

How to incorporate market cap in your portfolio

When it comes to balancing your portfolio between companies with various market caps, generally, the longer the investment horizon you have, the riskier your allocation might be — a longer timeline means more opportunity for your portfolio to recover from volatility. Long-term investors — for example, those saving for retirement that's decades away — could benefit from the potential growth of small- and mid-cap companies and still have time to weather unexpected downturns.

Investors who don’t want to take as much risk may want to root their portfolio in less-volatile large- and mega-caps, with a lower allocation of small- and mid-caps.

Often, market-cap data is also used to manage mutual funds. These funds can hold stock in dozens or even hundreds of companies, which allows investors to buy many stocks in a single transaction. Mutual funds often invest by category, so investors can buy small-cap or large-cap funds.

Market capitalization vs. float-adjusted market cap

Unlike market cap, float-adjusted market cap (sometimes called free-float market cap) is calculated using only shares that are available to the general public, excluding locked-in shares, such as those held by institutions and government agencies.

Many major stock indexes like the S&P 500 and the Dow Jones Industrial Average use float-adjusted market cap, as do many index funds and exchange-traded funds. Float-adjusted market cap is meant to give an even more accurate picture of how the market views and values a company’s stock. Explore to learn more about this.

Market capitalization vs. enterprise value

There’s one final distinction to understand: Market capitalization isn't the same as a company’s enterprise value. While market cap measures the value of a company’s equity, enterprise value measures the total value of the business, including its debts, assets and cash. Enterprise value is more complicated to calculate, but it also provides an extremely clear picture of what a company is worth.

Enterprise value is mostly used to determine the price of a company if it were to be acquired outright. However, experienced investors can use enterprise value alongside other performance data to determine whether a stock price is currently under- or overvalued relative to similar companies.