What Is Market Capitalization?

With so many investments available today, it can be overwhelming to build a portfolio. One way investors narrow down their choices is by considering a company’s size, which is where market capitalization comes in. But what is market cap, and why does it matter? This figure lets investors quickly assess a company’s size and compare it to others before making an investment.

What is market cap?

Market capitalization, or market cap, expresses the total market value of a company’s outstanding shares of stock.⁽¹⁾ It’s calculated by multiplying the current share price by the number of outstanding shares. This calculation typically includes both publicly traded shares and, in some cases, restricted shares held by company insiders, depending on how the market cap is reported.

A company’s stock price greatly influences its market cap. As demand for a company’s shares increases, the stock price may rise, which, in turn, increases the market cap. And vice versa. Because market cap is directly tied to stock price, it fluctuates as the share price changes.

This figure is important to investors because it helps them determine a company’s size. They can then use this value to compare companies and rank them by size, which is helpful when building a diversified portfolio or assessing risk.

How to calculate market cap

Calculate a company’s value by using the market capitalization formula.

Multiply the total number of outstanding company shares by the company’s current stock price. For example, if a company has one million outstanding shares trading at $60 a share, the current market cap is $60 million.

Market cap and company size

Companies are typically classified into five market cap categories based on their size: micro-cap, small-cap, mid-cap, large-cap and mega-cap.⁽¹⁾

Mega-cap companies

Mega-cap companies exceed the $200 billion mark and are often considered among the most stable investments. They are typically well-established, financially stable and often hold significant cash reserves to help weather market downturns.

Examples of mega-cap stocks include Microsoft (MSFT), Nvidia (NVDA) and Amazon (AMZN).

Large-cap companies

Companies with a market cap exceeding $10 billion are considered large-cap companies. These companies are generally well-established and more stable than smaller companies. Many large-cap companies also pay regular dividends, making them attractive to income-focused investors.

Examples of large-cap stocks include American Express Company (AXP), The Walt Disney Company (DIS) and AT&T (T).

Mid-cap companies

Mid-cap companies have a market cap of between $2 and $10 billion. They tend to be more volatile than large-cap companies but generally more stable than small-cap stocks. Many mid-cap companies are still growing and may offer greater growth potential than their large-cap counterparts.

Examples of mid-cap stocks include Wyndham Hotels and Resorts (WH), CarMax (KMX) and Boston Beer Company (SAM), the manufacturer of Samuel Adams.

Small-cap companies

Small-cap companies have a market capitalization ranging from $250 million to $2 billion. Many are still in a growth stage, which is why these stocks are generally considered higher risk.⁽²⁾ They offer the potential for substantial returns but also carry a greater risk of significant losses.

Examples of small-cap stocks include Weis Markets, Inc. (WMK), Century Communities (CCS) and Fresh Del Monte Produce (FDP).

Micro-cap companies

Micro-cap companies are the smallest publicly traded businesses, with market caps under $250 million. Many are still in the early growth stages and tend to generate limited revenue.

Because of their small size and lower stock prices — often under $5 — they’re frequently classified as penny stocks. These companies typically have low trading volume and aren’t widely covered by analysts, which can lead to sharp price swings and increased investment risk.

Market cap vs. free float market cap

Free float market cap, also known as public float or float-adjusted market cap, is a refined measure of a company’s value that includes only the shares available for public trading.⁽³⁾

Unlike the standard market cap, it excludes restricted shares held by insiders, company executives, governments or other entities unlikely to trade them. This approach gives investors a clearer picture of the actual market value based on shares that can be traded.

Enterprise value vs. market cap

Enterprise value (EV) is closely related to market capitalization, but they are not the same. While market cap reflects a company’s equity value based solely on its share price and outstanding shares, enterprise value offers a more comprehensive picture.

Enterprise value measures a company’s total value, including its market cap, debt and cash holdings.⁽¹⁾ Specifically, it adds the market value of the company’s debt and subtracts its cash and cash equivalents.

Unlike market cap, which provides a limited snapshot of a company’s equity value, EV estimates what it would cost to acquire the entire business. That makes it especially valuable in mergers and acquisitions and for comparing similar market-cap companies with different capital structures. Investors often use EV to identify the stronger investment between two otherwise similar companies.

How to consider market cap when investing

Market cap can be a valuable tool when building an investment portfolio. These are some considerations to keep in mind.

• Understand the risk-return tradeoff by cap size. A company’s market cap can give you an idea of risk versus return. Small-cap stocks present greater growth potential than large-cap stocks, which can translate to higher returns. However, the risk of failure is also higher with a small-cap company than a large-cap company.
• Diversify across market caps. Spreading your investments across different companies can reduce risk. Consider selecting a combination of large-cap, mid-cap and small-cap companies to diversify your holdings and leverage company growth.
• Use market cap to compare companies. A company’s market cap allows you to compare companies more easily. You can rank them according to size and then decide how they fit with your risk tolerance.
• Match your investment horizon with market cap. Your investment horizon should align with the type of companies you’re investing in. Small-cap stocks tend to be more volatile and may take longer to grow, making them more suitable for long-term investors who can tolerate higher risk. On the other hand, large-cap stocks are generally more stable and are more likely to pay dividends, which can appeal to investors seeking more consistent returns in the shorter term.

Before you finalize your investments, consider working with a financial advisor who can help you develop a long-term investing strategy that’s right for your financial goals.

Bottom line

Market capitalization is a valuable tool for investors to assess a company’s size and its potential role in a diversified portfolio. Whether you are evaluating a small-cap growth stock or a stable large-cap company, knowing the market cap helps you better understand the company’s scale and risk profile. This information can support smarter diversification and long-term strategy planning.

To get started, consider opening a brokerage account that lets you filter investments by market cap, so you can align your portfolio with your financial goals.

Frequently asked questions

Is a higher market cap better?

Companies with a higher market cap are generally considered more stable investments because they tend to be more established companies with consistent earnings and a history of growth.

To make sure you get accurate and helpful information, this guide has been edited by Matt Miczulski as part of our fact-checking process.

Written by

Lena Borrelli

Contributor

Lena Borrelli is an experienced finance writer with a deep understanding of personal finance, investing and consumer banking. Her work has been featured in top-tier publications such as Forbes, TIME, Bankrate, Moneywise and Annuity.org, where she provides expert insights on financial trends, smart money management and emerging fintech solutions. With a background in personal finance and content strategy, Lena specializes in breaking down complex financial topics into clear, actionable advice for readers. When she is not writing or scanning the news for the latest headlines, she is happiest spending time in the Florida sunshine with her husband and two pups. See full bio