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 help you decide whether a stock or fund belongs in your portfolio. And if it earns a place in your investment lineup, market cap could help you decide how much you should own.
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, and so can change over time or even over the course of a single trading day.
Why is market capitalization important?
Market cap is essentially a quick estimate of a company's value, in dollar terms.
It's a back-of-the-envelope way of putting a number on a company, but it's just one way of measuring this. Imagine that you were estimating the value of a country. You could measure it by the dollar value of the economy, or the size of the population, or the square acreage of the land. Measuring a company is similarly complex, but market cap is a simple and popular way of estimating its value and size quickly.
A company's market cap might help give you a sense of how risky its stock is. 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 very large companies. And of course, many specific companies will defy those generalizations.
Market cap is also important when building a portfolio. Understanding market cap may help you decide where a stock or fund fits into your asset allocation, plus how much of it you want to own. For instance, 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 get in on the action and buy shares. The price of that company's stock may then rise, driving the market cap up along with it. On the flip side, if a company starts losing money or faces a major scandal, then investors may start selling shares—taking 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. Exactly where you draw the lines between these 3 groups isn't set in stone, and some investors may have different opinions as to what number qualifies a company for which group. But 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. But when companies become very large their growth rates can slow, so they might also offer less growth potential than some smaller companies.
Mid-cap companies
Mid-cap companies are those that fall between large- and small-cap companies, and are generally considered to be companies 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. But because these companies may be less stable, less well-established, and have less access to cash, they might also be more vulnerable to downturns or even failure, and so can come with greater risk.
In addition to those 3 main categories, there are 2 more categories at the most extreme ends of the scale. The largest companies, such as those with market caps of $200 billion or more, are often called mega-caps. And the smallest companies, such as those 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 instance, say a company has 12 million shares currently selling at $32 per share. That comes out to a market cap of $384 million, which puts this company in the small-cap category today. Now, if the company grows and its share price eventually increases to $184, then its market cap increases to $2.208 billion. At that point, it might start to 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 value.
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 those held by certain other entities.1
Most major market-cap-weighted stock indexes, like the S&P 500® and Russell 2000 use free-float market cap in determining how large of a weighting to assign companies.
How to consider market cap when investing
With a solid understanding of market cap now under your belt, here are some ways to consider using it as you're researching investments and constructing your portfolio.
Choose an appropriate asset allocation
Successful investing starts with a well-thought-out and well-rounded plan. Whether you do the research yourself to choose an asset allocation, use an online tool to help guide you, or work with a financial advisor to build one, it's important to have a strategy that's appropriate for your needs and situation. The 3 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
Within the stock portion of your portfolio, 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 you achieve your targeted asset allocation, including your desired allocation among market-cap segments, without having to research hundreds of companies yourself.
Investors interested in researching investment options across various market-cap segments can use Fidelity's Stock Screener, Mutual Fund Evaluator, or ETF/ETP screener.