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What is market capitalisation?

03/06/2024

If you’re making your first forays into stocks, you may have seen the term “market capitalisation” or “market cap” during the course of your research.

But what does it actually mean, and why is it so important? Read on to find out…

 

The definition of market capitalisation

Market capitalisation is the value of a company that is publicly traded. It is calculated by multiplying the number of shares in issue by the price at which those shares are currently trading. 

This calculation gives you the total value of all shares: how much the company is currently worth on the market. Of course, share prices fluctuate regularly, so a company’s market cap is constantly changing. 

Stocks can be defined as large-cap, mid-cap or small-cap, depending on their value. This categorisation helps to decide which index they are listed on.

 

Why does market capitalisation matter?

By comparing the market caps of similar companies, investors and fund managers can decide whether they believe a company is valued correctly, or is under- or overvalued by the market. 

The higher a company is valued, the more likely it is that it has capital – and will have access to lending – to help it to grow. If a company is thinking of going public, its market cap can help execs to understand how much capital they could potentially raise.

Remember, however, that a company’s market cap is not the only thing that determines its true value. Companies with a similar market cap may have different levels of debt, different price-to-earnings ratios, and different asset holdings. Investors may wish to consider additional factors as well when deciding whether a company is worth their investment.  

 

“Stable Rise Limited is not authorised or registered by the Financial Conduct Authority. The marketing materials are not intended to provide financial advice nor promote any individual financial products.”

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