Market cap: the size of a company

The price of one share is not the size of the company

Imagine two pizzas of exactly the same size. One is cut into 4 slices, the other into 16. A slice of the first is bigger, but nobody would say the first pizza is bigger. To compare the pizzas, you look at the whole, not at one slice.

Shares work the same way. A company can be cut into a few million shares or into billions. The price of one share depends partly on how many pieces there are. So a $500 share does not mean a big company, and a $5 share does not mean a small or a cheap one.

Market cap: price × shares

To see what the whole company is worth to the market, multiply the share price by the number of shares that exist. The result is called market capitalisation, or market cap.

The number of shares that exist is called shares outstanding: every share held by investors, including the company’s founders and employees. The company publishes this number in its reports, and it changes only now and then — when the company issues new shares or buys some of its own back.

Why a high share price is not “expensive”

Beginners often avoid a $500 share because it feels expensive, and are drawn to a $2 share because it feels cheap. Neither feeling means anything. Whether a share is cheap or expensive depends on how the company’s value compares with what it earns and owns — a question the Research path covers later. The number on one share is not that answer.

Companies sometimes change the number of their shares without changing anything else. In a stock split, every share becomes two (or more), and the price halves. The company is exactly as big as before — market cap stays the same. The next lesson shows how.

Market cap moves with the price

Because market cap is the price times the shares, it changes every time the price changes. If the price rises 3% in a day, market cap rises 3% that day. That means market cap is the market’s opinion of the company at that moment, not a measured value like the cash in its bank account.

It also means the company does not have its market cap in money. A company worth $20 billion on the exchange may hold far less in cash. Market cap is what all the shares together would cost at today’s price — no more.

Large, mid and small

People sort companies by market cap into rough groups:

• Large cap — the biggest companies, usually well known, with long records. Their shares usually trade in large numbers every day.
• Mid cap — companies in between: established, often still growing.
• Small cap — smaller companies, often younger or in narrower businesses.

There are no official lines between them. A common rule of thumb puts large caps above about $10 billion and small caps below about $2 billion, but different sources draw the lines differently, and the lines move as markets grow. Treat the labels as a quick description, not a rule.

What the size usually tells you is something about risk. Smaller companies’ prices have usually moved up and down more than the largest companies’ — they have higher volatility. They can grow faster, and they can also fail more easily. A large company is not safe because it is large; it is simply less likely to depend on a single product or customer.

In short

Market cap is the share price times the number of shares outstanding — what the market says the whole company is worth today. Compare companies by market cap, never by the price of one share. Size labels are loose, but smaller companies’ prices have usually moved more, in both directions.