Paid non-client promotion: Affiliate links for the products on this page are from partners that compensate us (see our advertiser disclosure with our list of partners for more details). However, our opinions are our own. See how we rate investing products to write unbiased product reviews.

Market capitalization (market cap) is the total value of all a company's shares of outstanding stock.
Stocks are often categorized by the size of their market cap: large-cap, mid-cap, small-cap, or micro-cap.
An indicator of financial strength, market capitalization suggests how risky a stock is and what kinds of returns it might offer.

A big part of equity investing is trying to figure out what a company is worth. If you can measure a company's value, you'll be in a better position to know whether you want to commit your hard-earned capital to its stock.

One of the most common ways to evaluate public companies is by market capitalization, or "market cap" for short.

What is market capitalization?

Definition

Market capitalization is the total value of a company's outstanding shares of stock. In essence, it's what it would cost you if you were to buy up all of its outstanding shares at the current share price. It is a way of sizing up the value that investors give a company. Expressed in dollar figures (or whatever the local currency), it's made up of two factors: the number of a company's outstanding shares, and the price of each share.

Purpose

Market cap is an important concept because it allows investors to understand the size of a company and how much it's worth on the market. Investors can also use a company's market cap as an important tool when assessing the risk of a particular business. Smaller companies may have above-market growth prospects, meaning their revenue and earnings may expand at a more rapid pace than the broader stock market.

Larger companies, on the other hand, may be more established and stable in terms of maintaining their stock values. They might also pay dividends, which can be helpful for investors looking to draw an income from their holdings.

Investors can also use a company's market-cap to compare it to other businesses in the same sector or industry.

Market capitalization categories

There are several market-cap categories that investors can benefit from knowing. Being familiar with these categories, as well as the relationship between market cap and investment risk, can be quite helpful.

Large-cap

Large-cap stocks represent companies that have a market capitalization value of at least $10 billion. Large caps are usually mature, well-established companies that have been consistently successful and pay regular dividends. Though they lack great growth potential, large caps are a favorite of conservative investors for their steady payouts and prices.

The companies that make it to the large-cap category tend to have several characteristics in common.

They're transparent. Financial information about these companies is publicly available, as are reams of expert analysis and forecasting. It's easy to find the information you need to make well-informed investment decisions about these companies.
They pay dividends. Because they are so well-established in the market, these companies can commit to relatively high dividends. That means investors can expect consistent income from their company shares — payouts for immediate income or to reinvest back into the company.
They're stable. These are typically companies that have been around a while — decades, even a century — and have weathered some challenging economic conditions. Their operations, earnings, and share prices remain steady, no matter what the stock market overall is doing.

Mid-cap

Mid-cap stocks represent companies that have a market value between $2 billion and $10 billion. Mid caps are usually moderately risky but generally stable companies that still have room to expand. Since mid caps often offer both dividends and price appreciation, they can give investors a balance between income and growth.

While equity analysts, money managers, and stock-picking pundits publish up-to-the-minute data on the performance of both giant corporations and small, up-and-coming companies, you often have to dig for information about the mid-cap enterprises.

But this category of companies is actually made up of many reputable businesses and they tend to perform relatively well. The S&P MidCap 400 Index, which tracks 400 middle-capitalization companies, has a 10-year annualized return of about 9%, compared with 11% for the S&P 500, which is made up of large-cap stocks mostly with market values of $10 billion or more.

The companies that make up the mid-cap segment tend to have several characteristics in common.

They're large — but not enormous. These companies are often well-established in their region or in their industry. But they're usually not too big to fail if there is a real threat to the business or if the market for their goods and services dries up.
They often pay dividends. While large caps get much of the attention from income investors, many mid-caps are doing well enough that they can share profits with stockholders. While they reinvest earnings back into the business, they can also pay out substantial dividends.
They're fairly stable. Mid caps don't usually have the same diversified business model or access to resources that help large caps weather economic challenges and stock-market trends. Still, mid-cap companies typically have a track record of steady performance over a significant period of time — often years or decades. In the investment scheme of things, they're of moderate or middle (that word again!) risk.

Small-cap

Small-cap stocks are companies that have a market capitalization value between $300 million and $2 billion. Small caps are often new companies, focused on a niche market, or struggling financially. While small caps tend to be volatile and rarely offer dividends, they have a lot of growth potential and are often undervalued.

The following are characteristic of small cap stocks:

They're — you guessed it — little guys. These companies are often limited in size or outreach or both. They may be regional or not yet well established in the field. That means they have lots of room to grow, but also lots of room to fail. They may also become acquisition targets for larger corporations.
They rarely provide income. Many small caps don't pay dividends, preferring to reinvest their profits back into the company for further growth. They're not a great choice for income investors.
They're volatile. Many small-cap stocks attract excitement — but not a lot of actual investors. Their trading volume is low. That, along with their general lack of track record, means they tend to see large or sudden swings in price.

Micro-cap

Even smaller than small cap stocks, micro caps typically represent companies that have a market capitalization below $300 million. Of all the sizes mentioned, micro-cap stocks carry the greatest risk but also the highest potential to expand.

Why market capitalization matters

Investors

Investors can leverage market cap to evaluate the size of a company and its corresponding growth potential. This information can be quite helpful when it comes to portfolio risk management.

Since companies of different market-cap sizes vary in terms of their growth potential, income payments, and risk, spreading your investments among them is one way to balance your portfolio between appreciation and income, between conservative and aggressive.

Often, investors focus on a particular market-cap segment. Some may choose to stick with the big, stable, large caps — especially if they want to preserve their capital or derive income from their investments. Others may be attracted to the more volatile — and exciting — small caps, especially if they have a long time horizon to weather volatility or like aggressive growth stocks.

Cutting across industries and industrial sectors, each market cap group encompasses a big variety of companies and stocks. Still, analysts do note common tendencies and characteristics among stocks of similar market caps.

For example, Robert R. Johnson, professor of Finance at Creighton University, notes that small caps may be more volatile than mid and large caps — but they tend to perform better. Large-cap stocks provided average returns of about 10% annually from the early 20th century to the early 21st century, compared with about 12% for small caps, he says.

It doesn't sound like much in percentage terms. However, "over many years, that difference is enormous: one dollar invested in large-caps at the end of 1925, with dividends reinvested, would have grown to $9,243.90. That same dollar invested in small-caps would have grown to $39,380.90," Johnson notes. "The bottom line is that small-cap stocks provide higher returns, on average — but that comes at the cost of greater risk."

Companies

The market cap of a company could impact its ability to access credit. More specifically, larger companies may have an easier time securing funding and may also be able to obtain lower borrowing costs. This is based on lenders' perceptions that larger companies may be more creditworthy.

A company's market cap might also impact its acquisition potential. Larger companies (for example, IBM) may focus on buying up smaller companies, both so they can eliminate them as competition and also so they can add their revenue streams by gaining access to their products, services, staff, and customers.

If a large company is looking to engage in such mergers and acquisitions activity, it might view another sizable organization as a possible target to be involved in a so-called merger of equals.

Limitations of market capitalization

Not the only valuation metric

Market-cap is only one way to value a company. There are many other methods you can use, for example the price-to-earnings ratio (P/E), price-to-book ratio (P/B), and enterprise value.

The P/E ratio looks at how expensive a company's shares are relative to its earnings per share. This can give you a quick sense of whether a company is undervalued or overvalued.

The P/B book ratio compares the price of a company's stock to that organization's book value, which is how much the entity would be worth if it resolved all its debts and sold off its assets.

The enterprise value is determined by calculating a company's market cap, adding its cash and then subtracting what it would need to pay to resolve all its debt.

Market volatility

The relative volatility of the stock market can have an impact on the usefulness of market cap. A company's market cap is tied in with price movements, which can be quite significant in the short and long term.

Market capitalization FAQs

Ramsay Lewis

Ramsay is a freelance writer and data analyst at Crisp Analytics. He has worked in the Office of the Chief Economist in Canada's Department of Trade, and has advised on the financial chapters of First Nations treaties when he worked with Indigenous and Northern Affairs Canada. He has a Master's in Public Administration from the University of Victoria and a certificate in Data Science and Big Data from the Federal University of Paraná.