When a company is said to be worth $4 trillion, that number comes from its market capitalisation. Here’s what market cap is, how it’s worked out, and why it changes every second the market is open.
Market capitalisation, often shortened to market cap, is the total value of all of a company’s shares on the stock market.
It’s calculated by multiplying the current share price by the number of shares on issue. If a company has 100 million shares and each one is trading at $20, its market cap is $2 billion.
Because share prices change constantly while the market is open, market cap does too.
What it’s used for
Market cap is the most common way to measure the size of a listed company. When people say Nvidia, Apple or Microsoft is the world’s most valuable company, they’re comparing market caps.
It also decides which companies are included in major share market indexes. The ASX 200 is made up of the 200 largest companies on the Australian Securities Exchange, ranked mainly by market cap, and each company’s weight in the index depends on its size.
That matters because many super funds and exchange-traded funds track those indexes, so a company’s market cap influences how much money flows into its shares.
Large, mid and small caps
Investors often group companies by size. Large-cap companies are the biggest and most established, such as BHP, Commonwealth Bank and CSL in Australia. Mid-cap and small-cap companies are smaller, and micro-caps smaller still.
Smaller companies can grow faster, but they’re usually riskier, their share prices can be more volatile and their shares can be harder to buy and sell in large amounts.
What market cap doesn’t tell you
Market cap measures what investors are willing to pay for a company’s shares today. It isn’t the same as what the business has in the bank, or what a buyer would pay to own all of it.
A company’s enterprise value adds its debt and subtracts its cash, giving a fuller picture of what it would cost to buy the whole business. Takeovers usually happen at a premium to market cap, because buyers have to pay extra to convince shareholders to sell.
Market cap also tells you nothing on its own about whether a company is cheap or expensive. Two companies can have the same market cap but very different profits.
The biggest companies on the ASX are worth hundreds of billions of dollars. The world’s largest technology companies have market caps measured in trillions of U.S. dollars, larger than the entire Australian share market combined.
