Market capitalisation, often referred to as “market cap,” is a measure of the value of a publicly traded company. It is calculated by multiplying the total number of shares outstanding by the current market price of one share. The market capitalisation of a company provides an indication of the company’s size and can be used as a benchmark to compare companies within the same industry.
For example, if a company has 1 million shares outstanding and the current market price of one share is £10, the market capitalisation of the company would be £10 million.
Market cap can be used to classify companies into different categories based on their size. In the UK, companies are generally classified as follows:
- Large-cap: Companies with a market cap of £10 billion or more
- Mid-cap: Companies with a market cap between £2 billion and £10 billion
- Small-cap: Companies with a market cap between £300 million and £2 billion
- Micro-cap: Companies with a market cap below £300 million
Classifying companies based on their market capitalisation can be useful for investors as it gives them an idea of the level of risk associated with investing in a particular company. Generally, large-cap companies are considered less risky than small-cap companies because they have a more established track record, larger revenue streams and
greater financial stability. However, they also tend to have less growth potential than smaller companies. On the other hand, small-cap companies are considered to be higher risk, but they can also offer greater potential for returns.
It’s worth noting that market capitalisation is not a perfect measure of a company’s value or performance. It is based on the current market price of the company’s stock, which can be influenced by various factors such as investor sentiment, news, and economic conditions, and not necessarily the underlying fundamental value of the company. Therefore, market cap should be used as a guide and not as a sole indicator of a company’s value.
In summary, Market cap is a measure of the value of a publicly traded company, which is calculated by multiplying the total number of shares outstanding by the current market price of one share. It provides an indication of the company’s size and can be used as a benchmark to compare companies within the same industry. Companies in the UK are generally classified based on their market cap in categories such as large-cap, mid-cap, small-cap and micro-cap, with large-cap companies considered less risky but with less growth potential, and small-cap companies considered higher risk but with greater potential for returns. It’s important to keep in mind that market cap is not a perfect measure of a company’s value or performance and should be used as a guide rather than a sole indicator.
« Back to Financial Terms Index