Market capitalisation is a term often heard on the financial news but few new investors know what it is or how it is calculated. Market cap, as it is called for short, is the amount of money it would cost if you were to buy every single share of stock a company had issued at the current market price.
The Coca-Cola Company has 2,317,441,658 shares of stock outstanding. If the stock closed at say, $49.60 per share and you wanted to buy every single share of Coca-Cola stock in the world, it would cost you 2,317,441,658 shares x $49.60 = $114,945,106,236.80. That’s just short of $115 billion.
We would therefore refer to Coca-Cola’s market capitalisation as $115 billion.
Market cap is an important concept because it allows investors to understand the relative size of one company versus another. There are some shortcomings to using market capitalisation as a guide to a company’s size. The biggest is that market cap does not take into consideration a company’s debt.
In addition to having $115 billion in stock market value, Coca-Cola has $20 billion in debt. If you were to buy every share of Coke’s stock, you would own the company but still be responsible for the company’s $20 billion in debt. Thus, your “true” purchase price would be $115 billion + $20 billion = $135 billion.
A lot of professional investors divide their portfolio by market capitalisation size. This approach, they believe, allows them to take advantage of the fact that smaller companies have historically grown faster but larger companies have more stability and pay bigger dividends.
There are different types of market capitalisation categories:
- Micro Cap is a company with a market cap of less than $300 million.
- Small Cap is a company with a market cap of $300 million to $2 billion.
- Mid Cap is a company with a market cap of $2 billion to $10 billion.
- Large Cap is a company with a market cap of $10 billion to $50 billion.
- Mega Cap is company with a market cap of $50 billion or more.