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How to Calculate Market Cap: Formula Explained
The market cap formula should be in any investor/trader's essential toolkit for evaluating companies.
Published May 21, 2024.
Market capitalization is often mentioned in general overviews of stocks. It is an important metric to understand a company's size, value, and investment potential against geopolitical events. Often referred to as "market cap," it measures a company's overall value in the stock market. Market capitalization could also guide investors on how risky an investment might be and indicate its growth potential.
Note: Fortrade offers the ability to trade the price changes of instruments with CFDs and NOT to buy/sell ownership of instruments themselves. All the information in this blog is purely educational and should not be considered advice.
What Is Market Capitalization?
Market cap reflects the market's valuation of a company and can help understand the total worth of its equity to investors.
Depending on market cap value, businesses are typically described as small-, mid-, or large-cap, an important distinction used by traders interested in value investing.
| | Small-cap | Mid-cap | Large-cap |
|---|---|---|---|
| Market cap | $250 million - $2 billion | $2 billion - $10 billion | > $10 billion |
| Company dynamic | Niche markets, emerging industries, or start-ups | Established business models that may operate across different regions and markets | Industry giants with global reach, such as Apple or Amazon |
| Volatility | High | Balanced | Stable |
The Formula for Calculating Market Cap
Market cap = (Current share price) x (Total number of outstanding shares)
The current share price is the trading value of one of a company's available shares. The total number of outstanding shares is the number issued by the business that is available for traders and investors to purchase on the stock market.
To take Coca-Cola as an example, the current share price (at the time of writing) is $60.34, and there are 4.31 billion available shares. Therefore, its market cap is currently $260.21 billion.
You can find a company's share price and total outstanding shares in several places:
- Financial news websites (Bloomberg, CNBC, Reuters)
- Share stock exchange websites (New York Stock Exchange (NYSE) or NASDAQ)
- Businesses' websites, usually under investor relations
- Online brokerage platforms
The Importance of Market Cap in Investment Decisions
Some investors choose to build a well-balanced portfolio as this could spread potential risk across multiple sectors and markets instead of taking a chance on a single instrument. That often means including a mix of large-cap and low-cap companies.
Market cap is used to compare the size and value of companies in the same market sector—that way, investors can assess each company's potential growth and relative standing within the industry.
For example, having a trading account full of low-cap businesses in a single industry might be potentially profitable if things work in your favor, but it's attached to a high level of risk that might cause potential losses.
Market Cap Limits
Bear in mind that market cap may be a useful metric, but it should not be the only parameter for investment or trading decisions. It does not account for other factors like earnings quality, industry dynamics, or debt levels.
Moreover, the market cap can be skewed by short-term market fluctuations and is not an accurate guide to future performance. For a better overview, investors and stock traders should do a broader, more comprehensive analysis.
» Here's how to use CFD analysis for even better trading decisions
From Calculation to Potential Capitalization
Knowing how market capitalizations are calculated creates a better understanding of why this metric is important. Looking at a company's current share price and outstanding shares is a good start for evaluating its potential and limits.
However, any investment or trading decision shouldn't be made based on market cap alone.
Only through thorough analysis and overview of other metrics is it possible to make a well-informed decision. To that end, Fortrade Online Academy is an good resource with plenty of information and articles to help you on your CFD trading journey.
