Market capitalisation

The formula

• MC = P · n

P is the share price and n the number of shares outstanding. The product is what it would cost to buy every share at today’s price: the market’s value for the whole company.

A worked example

A share at 120 and 2,000,000 shares outstanding: MC = 120 · 2,000,000 = 240,000,000. Turned round, a company valued at 240,000,000 with 2,000,000 shares trades at 120, and one worth 240,000,000 at a price of 60 must have 4,000,000 shares.

What it is not

Market capitalisation is the price of the equity, not of the business. A company with 240,000,000 of market cap and 100,000,000 of debt costs a buyer 340,000,000 less whatever cash is in the bank; that figure, the enterprise value, is what a takeover pays. Nor is it what the company is worth by its books: the book value per share times the shares is usually a different number, and the ratio between the two is the price-to-book.

Size classes

Markets sort companies by market cap into large, mid and small caps, with thresholds that differ by exchange and shift with the years. The class matters for which index a share is in and which funds may hold it, which in turn moves the price.

Common mistakes

• Using the shares authorised instead of those outstanding. Only issued shares, less any the company has bought back, count.
• Mixing share classes. A company with two classes at different prices has a market cap that adds both.
• Reading a rising market cap as a rising business. The price moves with the market as well as the company.

Frequently asked questions