Market cap or market capitalization refers to a company’s total value of its outstanding shares. Calculated by multiplying the total shares with the present outstanding share price, the stock market cap of a company says a lot about a company and its economic strength.
As perceived from the point of view of the stock market, the worth of a company reflects the value of the market cap and thus, indicates the total net worth of its outstanding shares.
Outstanding shares refer to those shares that are withheld by external players in the stock market and the company has no excisable rights over them. The outstanding shares are different from treasury shares and hold an eminent position when it comes to the configuration of the market cap of a company.
The market cap is closely looked at by the stock market community as it portrays the fiscal value of a company and perhaps indicates how well the company is doing currently.
The concept of market cap is extremely important when it is about the stock market as it signifies the financial health of a company in the stock market.
Be it the Dow Jones Industrial Average stock display or the Nifty 50 stock market, all stock markets around the world consider the market cap of a company in order to list it among other companies.
More than that, investors look for the market cap of a company in order to consider investing in it. Often, companies engage in similar features that make it hard for the investors to finalize which one to invest in.
In this case, the market cap helps them evaluate their decision and decide where they need to put their money. For instance, two tech-based firms are in the top companies that have advanced products, high-end marketing, and rapid success rate.
If an investor is willing to invest in a tech-based firm, then s/he is likely to get confused regarding where to put his/her money. Yet, the market cap alone can help s/he to not only identify their final choice but also evaluate the financial strength of both companies.
(Must read - 10 largest stock exchanges in the world)
Here is a case study for you to get a better insight into this concept.
Market Cap Formula, Source
Microsoft is an American multinational corporation that was established in 1975. A tech-based company that manufactures computer software and related facilities, Microsoft has been reaching heights ever since it was launched in the market.
Ranked on the 47th position in the Fortune 500 list of global companies, Microsoft works with the vision to empower every individual and every institution on the planet to achieve the most.
With a market cap of over $2tn, Microsoft has been in the global Fortune 500 list with a market capitalization ranking at the 47th number, and is succeeding at a rapid rate.
Although the market cap is defined as the total value of a company’s outstanding shares, there are various tiers of market cap or categories of market cap that will help us understand the concept in a much better way.
Categories of Market cap
In order to begin with this segment, one must note that there are 5 tiers of market cap. They are as follows -
(Please note that categorization of market cap worth has a standard spectrum of ranges, as described in Indeed.com and market cap of top-notch companies, listed as examples in below section, is in reference with the website companiesmarketcap.com)
The topmost layer of the market cap is mega-cap. Mega-cap, the most elite bracket of companies that are worth $200bn and above, is the highest layer that is involved in the stock market.
A recent extension of the tiers of market cap, this layer involves companies that are extremely large in size and their fiscal strength is extremely fine.
Some of the mega cap stocks 2021in NASDAQ are Apple Inc, Microsoft, Amazon, and Facebook are mega-cap companies with a market cap of $2.46tn, $2.11tn, $1.808tn, and $981.7tn respectively as reported by comapniesmarketcap.com
By making their way from all the tiers to the topmost tier, these companies have a promising position in the stock market that definitely attracts investors from all over the globe.
(Must read - Nasdaq and its market structure)
The second-most tier of market cap is the large-cap tier that involves companies that are worth $10bn-$200bn. Much like the mega-cap layer, large-cap companies too have a promising market when it comes to investing in their outstanding shares.
Conventionally, this tier was the topmost tier in the market cap. However, with the addition of the mega-cap tier, large-cap companies are ranked to be the 2nd highest companies in terms of the worth of their outstanding shares.
Companies that fall under the category of large-cap are Wipro, Starbucks, and HP with a market cap of $45.20bn, $140.53bn, and $34.25bn respectively.
Mid-cap is the middle layer of market cap division that involves companies that are worth $2bn-$10bn. Companies included under this domain often represent a profitable yet evolving market to the investors looking for budding stocks.
Unlike mega-cap and large-cap companies, mid-cap companies do not have an established reputation in the stock market. Yet, they are regarded and looked up to for their market size and growing operations.
Some of the mid-cap companies are Andritz, Adani Gas, and Ralph Lauren with respective market caps of $5.54bn, $5.48bn, and $8.13bn.
(Read also: Types of Financial Risks)
The 4th tier in the categorization of market cap is the small-cap tier that involves companies that are worth $300mn-$2bn. Such companies are in their growing phase and are perceived by the investors as profitable stocks as they have a huge margin for growth.
While investing in mega-cap and large-cap companies might be considered a ‘conservative’ move, putting money in small-cap growth stocks takes extensive research and good instincts since these companies are still making their place in the stock exchange list.
Some small-cap companies are - Tata Coffee, SpiceJet, and Reliance Communications with respective market caps of $0.49bn, $0.61bn, and $.014bn.
The last of all tiers, micro-cap is also a recent addition in the market cap categorization. Defined as the market cap tier that includes companies that are worth $50mn- $300mn, this tier covers all such companies that are expanding and evolving.
Nano cap stock companies offer similar risks and advantages like small-cap companies do. Companies with micro-fiscal strength and budding aspirations are placed in this category.
3 companies placed in the micro-cap category are - Pieris Pharmaceuticals, Quick Heal, and Alaska Communications with a market cap of $200mn, $230mn, $180mn respectively.
(Must catch: 5 Option Greeks: Delta, Gamma, Theta, Vega & Rho)
After learning about the 5 layers of market cap, you must have now understood the concept in a better manner.
While it is important to note that mega-cap and large-cap companies have a fine reputation in the stock market and are high-end companies, it may not be necessary that companies in the large-cap category will have stock prices more than that of small-cap companies.
It certainly determines the size of a company and the outstanding shares the company is worth. Yet, small-cap companies can have their shares priced at a higher price as compared to the shares of large-cap or mega-cap companies.
Although large-cap companies often pose a preservative and promising share market, small-cap companies are equally worth your money. Yet, it is important for an investor to conduct extensive research and look deeply into the matters of all companies before they invest in their outstanding shares.
(Related blog: Pros and Cons of Penny Stocks)
Seldom, investors get confused between two concepts - market cap and net worth. While these concepts may sound similar, they are simply apart. Let us have a quick look over what they mean and the underlying difference between the two.
Market capitalization is the value of a company’s outstanding shares multiplied by the current stock price of the company. Market cap indicates the financial strength of a company in the stock market.
On the other hand, the net worth of a company is defined as the current worth of a company as calculated by different metrics like price-to-earnings, price-to-sales, and return-on-equity.
The net worth of a company is calculated by adding all the assets of a company and subtracting potential liabilities from that value. These parameters help one to evaluate the market value of a company or the net worth of a company.
(Related reading: Option Trading Strategies)
Let us understand this with an example. Apple Inc. is an eminent tech-based corporation based in the USA. With a market cap of over $2tn, Apple net worth rested at $65.43bn at the end of financial year 2020.
“In August 2018, Apple Inc. (AAPL) became the world's first company to record a market capitalization of $1 trillion and roughly two years later, became the first publicly traded U.S. company to surpass $2 trillion.” Apple Inc Net Worth
5 Factors Influencing Consumer BehaviorREAD MORE
Elasticity of Demand and its TypesREAD MORE
What is PESTLE Analysis? Everything you need to know about itREAD MORE
An Overview of Descriptive AnalysisREAD MORE
What is Managerial Economics? Definition, Types, Nature, Principles, and ScopeREAD MORE
5 Factors Affecting the Price Elasticity of Demand (PED)READ MORE
Dijkstra’s Algorithm: The Shortest Path AlgorithmREAD MORE
6 Major Branches of Artificial Intelligence (AI)READ MORE
Scope of Managerial EconomicsREAD MORE
7 Types of Statistical Analysis: Definition and ExplanationREAD MORE