Market Capitalization of a Public Company | Market Cap Ranking

The market capitalization, also known as the market cap, of a public company is the share price multiplied by the number of outstanding shares. It gives you the market value of how much a company is worth.

Here's a real life example. As of the writing of this article Coca-cola's (KO) market capitalization calculation is $125.19 billion, which is 2.31 billion outstanding shares multiplied by their share price of $54.31.

Why It's Important: It's all about risks and returns, and large and small caps each have their own unique set of advantages and disadvantages. The larger the cap, the less risky the investment, but generally lower returns. Smaller the cap, the riskier the investment, but greater potential return. 

Wall street uses the market capitalization as the main indicator of a company's size, rather than the stock price, employees, revenue or book value of assets. There are generally 3 commonly used cap size categories - large-cap, mid-cap and small-cap.

There are no exact definitions of these categories. Commonly used values look something like the following:

• Large-cap: over $10 billion
• Mid-cap: $2 billion–$10 billion
• Small-cap: less than $2 billion

A large-cap companies include well-known blue chips like GE, Coca-cola, Microsoft, Apple, Goldman Sachs, Bank of America, etc. Many of these large-cap companies are also included in the Dow Jones Industrial Average.

Mid-cap companies would be the likes of Whole Foods, Red Hat, The Washington Post and Advanced Auto Parts. Small-caps would include less known companies like the online diamond dealer Blue Nile, Alaska Airlines and Domino's Pizza.

More recently some have started to refer to certain sized companies as mega-caps, micro-caps and even nano-caps. To get an idea, here is how you could categorize these companies:

• Mega-cap: Over $200 billion
• Micro-cap: $50 million-$300 million
• Nano-cap: Below $50 million

For example, a couple of companies with some of the largest market capitalization is the Exxon Mobil Corporation at $323.60 billion and Microsoft at $275.30 billion. These, of course, would be considered mega-cap companies.

Here is a market capitalization ranking of the largest cap companies as of the writing of this article.

Risks and Returns Based on Size

It is important to understand market capitalization when you are doing your asset allocation for your investment portfolio. Each kind of market cap comes with it's own sets of risk and rewards.

Historical market capitalization data has shown that the larger the market caps get, the lower the risk. Think GE, Johnson and Johnson, Phillip Morris and other blue chips which have shown to have steady growth over time. The other side of that same risk token is the fact that large-caps have also proven to not provide extraordinary returns.

Similarly, historical market capitalization data has also shown that your best chances of extraordinarily high returns is with small-cap companies. Of course, on the other side of that is the fact that many small-cap companies don't survive or may never go up in value.

Words of Caution

Here are some words of caution when dealing with market caps. If you don't understand it correctly, you might use it incorrectly to make your investment decisions.

Market Cap vs Stock Price

The size of the company is not the same thing as it's stock price. Even if a share price for a company soars to $300 per share, if they only have 5 million shares outstanding, then it gives them a market cap of $1.5 million. With that market value, even though the share price is sky high, it is still considered a small-cap company.

Market Value and Fundamentals

Sometimes the market cap of company does not necessarily mean that it is the correct fundamental value of a company. Again, it is the market value, which means it is the value that the market is placing on a company. And the market is made of people who are fallible, dishonest, pulled by emotions, susceptible to trends that may or may not be valid.

The market cap is different than the book value, which is the total value of assets the company owns minus their liabilities on the balance sheet. Basically, the value of all the stuff the company owns minus what they owe.

Many stock indices like the S&P 500 composite index, FTSE, and Nikkei all adjust the market cap according a free float weighted basis. Much of any given public company's outstanding shares may be owned by a single holding company, investor or institution which has controlling shares in the company.

When this occurs, those shares don't usually come available on the open stock market. Many of these stock indices account for that and don't include it in there calculation of the market cap.

Similarly, index funds that follow these indices, like the many S&P 500 index funds, don't include those unavailable shares in the market capitalization calculation. This will give it a better reflection of how the free market values these companies.