Market Cap

What is Equity Market Capitalization (EMC)?

EMC, usually referred to as market capitalization or market cap, is the total value of a publicly traded company’s outstanding common shares owned by stockholders. It is calculated by multiplying the price of a stock by its total number of outstanding shares. For example, a company with 20 million shares selling at $50 a share would have a market cap of $1 billion.

Understanding EMC

In other words, EMC refers to the total dollar market value of a company’s outstanding shares as derived from its share price. It is thus calculated by multiplying the number of a company’s shares outstanding by the current market price of one share. The investors uses this figure to determine a company’s size. A company’s size is a basic determinant of various characteristics, such as riskiness or volatility, that is of interest to investors.

Read more about What is Enterprise Value (EV)

Classification by market capitalization

Since EMC allows investors to understand the size of one company in relation to another by measuring what the company is worth on the open market, as well as the market’s perception of its future prospects, because it reflects what investors are willing to pay for its stock.

ClassificationMarket Value Range
1Mega-Cap>$200 billion
2Large-Cap$10 billion ~ $200 billion
3Mid-Cap$2 billion ~ $10 billion
4Small-Cap$300 million ~ $2 billion
5Micro-Cap$50 million ~ $300 million
6Nano-Cap<$50 million
Levels of market capitalization
  1. Mega-Cap and Large-Cap companies are typically firms with a market value of $10 billion or more. These firms often have a reputation for producing quality goods and services, a history of consistent dividend payments, and steady growth. They are often dominant players within established industries, and their brand names may be familiar to a national consumer audience. As a result, investments in mega-cap and large-cap stocks may be considered more conservative than investments in small-cap or mid-cap stocks, potentially posing less risk in exchange for less aggressive growth potential.
  2. Mid-cap companies are typically businesses with a market value between $2 billion and $10 billion. Typically, these are established companies in industries experiencing or expected to experience rapid growth. These medium-sized companies may be in the process of increasing market share and improving overall competitiveness. This stage of growth is likely to determine whether a company eventually lives up to its full potential. Mid-cap stocks generally fall between large caps and small caps on the risk/return spectrum. Mid-caps may offer more growth potential than large caps, and possibly less risk than small caps.
  3. Small-cap companies are typically those with a market value of $300 million to $2 billion. Generally, these are young companies that serve niche markets or emerging industries. Small caps are considered the most aggressive and risky of the 3 categories. The relatively limited resources of small companies can potentially make them more susceptible to a business or economic downturn. They may also be vulnerable to the intense competition and uncertainties characteristic of untried, burgeoning markets. On the other hand, small-cap stocks may offer significant growth potential to long-term investors who can tolerate volatile stock price swings in the short term.
  4. Micro-cap companies generally have a market value between $50 million and $300 million and offer the same risks and rewards as small-cap companies. Often, the financial sector won’t differentiate between micro-cap and small-cap and will instead include all companies at these two levels in small-cap.
  5. Nano-Cap, similarly, publicly traded companies with a market value of less than $50 million are referred to sometimes interchangeably as nano-cap companies or micro-cap. Nano-cap companies are some of the riskiest to invest in, but also growing in popularity.

What could impact a company’s EMC

There are several factors that could impact a company’s market cap. Significant changes in the value of the shares – either up or down – could impact it, as could changes in the number of shares issued. Any exercise of warrants on a company’s stock will increase the number of outstanding shares, thereby diluting its existing value. As the exercise of the warrants is typically done below the market price of the shares, it could potentially impact the company’s market cap.

But market cap typically is not altered as the result of a stock split or a dividend. After a split, the stock price will be reduced since the number of shares outstanding has increased. For example, in a 2-for-1 split, the share price will be halved. Although the number of outstanding shares and the stock price change, a company’s market cap remains constant. The same applies for a dividend. If a company issues a dividend – thus increasing the number of shares held – its price usually drops.

Leave a Reply