Market capitalization — or market cap for short — is the total market value of all outstanding shares.
It tells you the current market value of a stock or group of stocks.
It’s not a cool hat for traders and investors … sorry to let you down.
Photo by Mediamodifier on Unsplash
If you’re still confused, fear not … Let’s review the simple formula used to calculate the market cap…
Market Cap Formula
You don’t need to write this down.
Just look at the formula to understand how the market is calculated…
Market Cap = [Total Shares Outstanding] * [Current Share Price]
It gets even simpler.
You don’t even need a calculator…
How to Determine Market Cap
This is the easy part … Look it up!
I prefer to use Yahoo! Finance. Type in the ticker (or company) you’re looking for, and the market cap is listed under the stock price.
Here’s an example. I circled the market cap in purple.
Every major stock information website will include the market cap.
Ok, let’s talk about how it compares to the stock price.
Market Cap vs. Stock Price with Example
Stock prices only tell you part of the story.
For example, at writing, the stock price of Tesla (TSLA) is about $700. In comparison, Apple’s (AAPL) stock price is about $140.
You might think that means that Tesla is worth 5X more than Apple. But that’s not the case.
The share price is only part of the equation.
If you want to compare the company’s true values you need the market cap.
There are about 1 billion outstanding shares of TSLA stock. While there are over 16 billion shares outstanding of AAPL stock.
So each company’s total value (market cap) is…
TSLA … [1 billion shares] X [$700 share price] = $700 billion
AAPL … [16 billion shares] X [$140 share price] = $2.2 trillion
In reality Apple’s market cap is more than 3X that of Tesla.
The market cap does change at the same rate as the stock price. When the stock price rises 1%, so does the market cap.
If the stock price falls 5%, so does the market cap.
The Best Market Cap
Generally speaking, stocks with smaller market caps have more room to run. In contrast, stocks with larger market caps have more difficulty making big moves.
It makes sense too.
A company with a market cap of $10 million only needs a little momentum to grow to $100 million.
But a company with a $1 trillion market cap needs a lot of momentum to grow to $1.1 trillion.
A low market cap means the market lacks faith in the company. And a high market cap means the market believes in the company’s future.
Just remember this…
The market is always forward-looking.
A high market cap signals that the market believes good things are coming. But it’s no guarantee.
No one can predict the future.
Thanks for reading!
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