Market capitalization, usually shortened to market cap, is the total price the stock market currently puts on all of a company's shares. You calculate it by multiplying the share price by the number of shares outstanding (the shares held by investors, not the ones the company has bought back and holds itself). Because the share price changes during every trading day, market cap changes with it. It measures what the market is asking for the shares today, which is a different thing from what the business owns, earns or could be sold for. Market cap counts only the shares. Enterprise value goes further and adds the company's debt and subtracts its cash, which is why the two numbers differ.
Worked example
Company A has 50 million shares outstanding and its shares trade at $20. Market cap = $20 × 50 million = $1,000 million, or $1 billion. Say the share price rises to $22 the next month while nothing else changes: market cap = $22 × 50 million = $1,100 million. Now suppose Company A also owes lenders $300 million and holds $100 million in cash. Enterprise value = $1,000 million + $300 million - $100 million = $1,200 million. The market cap tells you what the shares cost in total, the enterprise value what the whole business costs once its debt and cash are included.
Why it matters
Market cap is the quickest way to see how big a listed company is in the eyes of the market, and it is the starting point for many other measures: price-to-earnings and similar multiples all compare the market's price with something the company produces. It is also how investors group companies into small, mid and large caps, but the cut-off amounts are conventions that differ between index providers, brokers and countries, so check the definition your source uses before comparing. Market cap has limits. It says nothing about debt, so two companies with the same market cap can be very different businesses; enterprise value fills that gap. Share price is not size either: a $500 share can belong to a smaller company than a $5 share, because only price times share count gives the total. Where a company has several share classes, the total needs all of them. A large or small market cap is a starting point to look into, not a judgement on the company.
Frequently asked questions
Market cap is short for market capitalization: the share price multiplied by the number of shares outstanding. It is the total price the stock market currently puts on all of a company's shares, and it changes whenever the share price changes.
No. It is the market's current asking price for the shares, not a measure of what the business owns, earns or could be sold for. It also ignores debt and cash, which is why enterprise value exists as a second number.
Market cap counts only the shares. Enterprise value starts from market cap, adds the company's debt and subtracts its cash, so it shows the price of the whole business. A company with a lot of debt can have a much higher enterprise value than market cap.
The labels are conventions, and the cut-off amounts differ between index providers, brokers and countries. Look up the definition your source uses instead of relying on one fixed number.
Related terms
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