What Is Market Capitalization?
Market capitalization, usually shortened to "market cap", is the total market value of an asset. For a listed company it is the current share price multiplied by the number of shares in circulation. For a cryptocurrency it is the price of one coin multiplied by the number of coins that are currently in circulation.
A simple example
If a company has one billion shares and each trades at ten dollars, its market cap is ten billion dollars. If the share price rises to eleven dollars, the market cap rises to eleven billion, even though the business itself did not change overnight. That is why market cap moves every time the price moves.
Why it is used for ranking
Market cap lets you compare very different things on the same scale. A company with a larger market cap is valued more highly by the market than a smaller one. This is the idea behind the global ranking on Money in the World, which places companies, cryptocurrencies and metals in one list.
Large, mid and small
Analysts often group companies into large-cap, mid-cap and small-cap. Large companies are usually older and more established, while smaller ones can grow faster but are often more volatile. The exact boundaries differ between sources, so treat the labels as rough guides.
What market cap does not tell you
- It is not the price. A share costing 500 is not automatically "more expensive" than one costing 5; the number of shares matters.
- It is not company profit or cash. It reflects what investors are willing to pay, not what the company earns.
- It is not what you could sell for. If many holders tried to sell at once, the price would likely fall.
- For some assets it does not exist. Currencies, indices and flow-based commodities such as oil have no market cap, and the market cap of precious metals can only be estimated from the stock believed to exist.
Using it wisely
Market cap is a helpful starting point for understanding size, but it should be combined with other information such as earnings, debt, growth and risk. It describes what something is worth to the market right now, not whether it is a good investment.
More guides
- How to Read a Price Chart
- What Moves Currency Exchange Rates?
- Gold, Silver, Platinum and Palladium Explained
- How Cryptocurrency Prices Work
- Understanding Stock Market Indices
Disclaimer: this article is for education only and is not investment advice. See our Terms & Disclaimer.