What Is Market Cap? Market Capitalisation Explained
Market cap, short for market capitalisation, is the total market value of a listed company’s shares. It is calculated by multiplying the current share price by the number of shares outstanding.
Investors often use market cap to compare company size, but it does not tell you everything. This article explains how the market capitalisation formula works, what can change a company’s market cap and how it differs from other measures of company value.
The information in this article is provided for educational purposes only and does not constitute financial advice. Consult a financial advisor before making investment decisions.
Table of Contents
What Is Market Cap?
Market cap is a way of measuring the size of a publicly listed company based on the current market value of its outstanding shares. It reflects what the market currently thinks the company’s equity is worth.
For example, if a company has 50 million shares outstanding and each share trades at £10, its market cap is £500 million.
How to Calculate Market Capitalisation
The market cap formula is:
Market Cap = Current Share Price × Shares Outstanding
Shares outstanding refers to the total number of a company’s shares currently issued and held by shareholders.
Consequently, a company’s market cap can change when:
- Its Share Price Rises or Falls: Because market cap is calculated using the current share price, market movements directly affect it.
- New Shares Are Issued: This increases the number of shares outstanding, which can affect market cap, although it depends on how the market reacts.
- Shares Are Bought Back: This reduces the number of shares outstanding. Again, the overall effect depends on how share price responds.
Market Cap Categories
Companies are often grouped into different categories according to their market cap, which can help investors compare companies of different sizes. The table below shows commonly used ranges; however, there are no fixed definitions and thresholds can vary.
Larger companies are typically well established in their industry, have a significant market presence and have achieved a certain level of success. Smaller companies may have more room to grow, but their shares may be less liquid and prices more volatile.
Whilst a company’s market capitalisation can provide useful context, it should not be used in isolation to judge an investment’s risk profile or potential returns.
Why Market Cap Matters
Market cap can help investors compare the relative size of publicly listed companies. This is more revealing than looking at share price alone, which doesn’t necessarily tell you anything about a company’s size. A company with a lower share price may have a higher market cap if it has more shares outstanding.
Market capitalisation can also provide context for how a company’s shares may behave. Larger companies are often more established and tend to have higher trading volumes, whilst smaller companies can sometimes experience sharper price movements due to lower liquidity.
However, market cap alone does not tell us whether a company is fairly valued or a sound investment. In order to gain a complete picture, investors usually consider it alongside other factors, such as a company’s fundamentals and wider market conditions.
Market Capitalisation vs Enterprise Value
Market cap and enterprise value are related but measure different things. Market cap measures the stock market value of a company’s outstanding shares; it is based on share price and share count and doesn't consider any other factors.
Enterprise value takes things further by also considering debt and cash. It is sometimes described as a theoretical takeover value, demonstrating what it might cost to acquire a company, as the buyer would effectively take on its debt whilst also gaining access to its cash.
The formula for enterprise value is:
Enterprise Value = Market Cap + Total Debt - Cash and Cash Equivalents
For example, two companies may have the same market cap, but one may have much higher debt and less cash. Whilst market cap alone would not show that difference, enterprise value does.
Free-Float Market Cap
Free-float market cap measures the market value of shares that are available for public trading. It excludes shares that are locked-in, such as those held by company insiders, controlling parent companies or governments.
The free-float market cap formula is:
Free-Float Market Cap = Share Price × Free-Float Shares
This measure is often used by stock market indices. For example, an index provider may give more weight to a company with a larger free-float market cap, because more of its shares are available to trade on the open market.
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Frequently Asked Questions
What Is Market Cap in Simple Terms?
Market cap is the total stock market value of a publicly listed company’s outstanding shares. It is calculated by multiplying the current share price by the number of shares outstanding.
How Do You Calculate Market Cap?
To calculate market cap, multiply a company’s current share price by its total number of outstanding shares. For example, if a company has 20 million shares outstanding and each share trades at £15, its market cap is £300 million.
What Company Has the Highest Market Cap?
Nvidia is the largest company in the world by market capitalisation, at the time of writing (June 2026).
Does a Higher Market Cap Mean a Company Is More Valuable?
A higher market cap means the stock market currently places a higher value on a company’s shares. However, it does not show whether a company is fairly valued. For this reason, market cap is typically considered in combination with other factors, such as a company’s fundamentals.
Do Stock Splits Affect Market Cap?
A stock split does not directly affect a company’s market capitalisation. In a stock split, the number of shares outstanding increases, but the share price is simultaneously adjusted lower by the same proportion. Consequently, the market cap remains the same. For example, after a two-for-one stock split, an investor would hold twice as many shares, but each share would trade at half the previous price.
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