Market cap (market capitalization) is the total value of a company on the stock market. It's the company's true "size", and it clears up a very common confusion: the price of a single share doesn't tell you how much the company is worth.
How it's calculated
Market cap is found by multiplying the share price by the total number of shares outstanding:
- Market cap = Share price × Number of shares
If a company has 500 million shares trading at $20 each, its market cap is $10 billion. That's the price the market puts on the entire company.
Why the share price is misleading
It's the most typical beginner's mistake: thinking a $5 share is "cheap" and an $800 one "expensive." It makes no sense. A company with $5 shares and billions of them can be worth far more than one with $800 shares and few of them. What matters isn't the price of one share, but the market cap (the value of the whole) and what you get for it (profits, sales, assets).
What it's for
Market cap is the starting point of almost every valuation. The P/E compares market cap with profit; the price-to-sales ratio, with revenue. It also serves to classify companies by size (large, mid and small cap) and to compare two companies head-to-head, something impossible looking only at the share price.
How to use it well
Use market cap to understand size and as the basis of valuation multiples, not as a measure of cheap or expensive on its own: a huge company can be cheap and a small one wildly expensive. To judge valuation, always combine it with profits and growth; learn how in how to tell if a stock is cheap or expensive.