Market cap, or market capitalization, is a simple investing concept that can help you better understand a company's market value. Knowing a company's market cap might help you gauge its risks and decide whether a stock or fund belongs in your portfolio.
What is market cap?
Market cap is the total dollar value of a company's outstanding shares of stock. For example, if a company has 1 million shares of outstanding stock and the stock currently trades at $50 per share, then its current market cap is $50 million. Market cap fluctuates with a company's share price, so it can continuously change.
Why is market capitalization important?
Market cap is essentially a quick estimate of a company's value, in dollar terms.
A company's market cap might help give you a sense of the stocks risk factor. Larger companies are often more established and have less volatile stocks. Smaller companies may have more volatile stocks, but in some cases may be able to grow faster than large companies. Of course, this is not always the case.
Market cap can be useful when building a portfolio. Understanding market cap may help you decide where a stock or fund fits into your asset allocation. For example, if you've decided on an asset allocation of 70% stocks and 30% bonds, you might spread that 70% among companies of various market capitalizations, to align with your risk tolerance.
What could impact a company's market cap?
Anything that impacts a company's stock price will also impact its market cap. For example, if a company is perceived as successful, perhaps due to new products or growing profits, investors may want to buy shares. The price of that company's stock may then rise, driving the market cap up along with it. On the other side, if a company starts losing money or faces a major scandal, then investors may start selling shares—making the stock price and market cap lower.
Market cap segments
Companies are generally sorted into 3 main market cap segments: large-cap, mid-cap and small-cap. The following are commonly used definitions for each group.
Large-cap companies
Large-cap companies generally have a market cap of $10 billion or more. These are often well-established companies. Some large-cap companies might be mature businesses that pay dividends. Large-cap companies, as a group, may pose less risk and volatility to investors than smaller companies. However, when companies become large their growth rates can slow, so they might also offer less growth potential than some smaller companies. Of course, extremely high growth companies can also become some of the largest companies by market cap.
Mid-cap companies
Mid-cap companies are those that fall between large and small-cap companies, and are generally considered to be those with a market cap between $2 billion and $10 billion. As a group, their risk level is typically also considered to be a middle ground between large and small-caps, with potentially less risk than small caps but more than large caps.
Small-cap companies
Small-cap companies generally have market caps between $250 million and $2 billion. Small-caps are often younger companies that are aiming to grow their businesses quickly. When small-caps are successful, they might be able to show fast growth and strong stock gains. However, because companies may be less stable, not as well-established, and have little access to cash, they might also be more vulnerable to downturns or even failure, and they can come with greater risk.
Additionally, larger companies, such as those with market caps of $200 billion or more, are often called mega-caps. Smallest companies, with values of less than $250 million, are typically considered micro-caps.
How to calculate market cap
You can calculate a company's market cap by using the market capitalization formula.
Market cap = number of outstanding shares × price per share
For example, say a company has 12 million shares currently selling at $32 per share, which comes out to a market cap of $384 million, putting this company in the small-cap category. Now, if the company grows and its share price increases to $184, then its market cap increases to $2.208 billion. At that point, it might be considered a mid-cap company.
Market cap vs. free-float market cap
Market cap considers all of a company's outstanding shares, and is a common measure used to describe a company's size.
Free-float market cap considers only shares that are considered to be freely available for trading in the market, and is a common measure used in index weightings. Free-float market cap takes market cap and subtracts for shares that are unlikely to be traded. This typically means subtracting shares held by officers and directors of the company, those held by another publicly traded company, and by certain other entities.1
How to consider market cap when investing
Here are some ways to consider using market cap as you're researching investments and constructing your portfolio.
Choose an appropriate asset allocation
Whether you do the research yourself to choose an asset allocation, use an online tool to help guide you, or work with a financial professional to build one, it's important to have a strategy that's appropriate for your needs and situation. The key concepts of risk tolerance, risk capacity, and time horizon can help guide you to a suitable plan. (Read more about the 3 keys to choosing investments.)
Evaluate ways to diversify
When evaluating investment opportunities, you might consider diversifying among large-cap, mid-cap, and small-cap companies. That's because there might be times when one of these groups performs well, but another doesn't. (Read more in our guide to diversification.)
Consider keeping it simple with ETFs and mutual funds
If you're building a portfolio yourself, it can be a lot of work to analyze and choose individual companies to invest in, plus assemble a well-diversified portfolio of individual stocks. ETFs and mutual funds might be able to help with achieving your targeted asset allocation, including your desired allocation among market cap segments, without having to research hundreds of companies.
Investors interested in researching investment options across various market cap segments can use Fidelity's Stock Screener, Mutual Fund Evaluator, or ETF/ETP screener.