If you want to know what a company is worth then you should look at its market capitalisation or market cap. Market cap is the amount of money you would have to pay if you wanted to buy up all the shares in a company on the stock exchange. It’s a useful measure to help investors understand what type of company they are investing in.
Here we take a look at some key details about market cap. We also answer common questions like “what affects market cap?” and “How does market cap affect investment strategy?”
What is market cap?
Market capitalisation or market cap is a measure of the total market value of a company’s shares. It’s calculated by multiplying together the number of shares that exist by the price of those shares. For example a company with 10 million shares issued that are worth £8 each has a market capitalisation of £80 million.
Investors use this figure to determine a company’s total size and its place on the stock exchange. It is also used to work out if a potential takeover bid offers good value to shareholders.
What affects the market cap?
The market cap of a company increases when the share price goes up or new shares are issued. Share prices usually increase due to investor confidence. Good financial results or the expectation of future profits may result in share prices increasing. In contrast, worse than expected results or bad news about a business can cause the share price to drop.
External factors such as a global recession or other financial news can result in widespread increases or decreases in share prices across the whole stock exchange. When share prices are trending upwards over time this is known as a bull market. When share prices are depressed for over 2 months this is known as a bear market.
Where can I find the market cap?
You can find the market cap of any company listed on the London Stock Exchange. A list of companies included in the FTSE 100 index, along with their market capitalisation, can be found on the London Stock Exchange website. Investors are able to sort the list by market cap, share price or the recent change in share price.
How does the market cap affect a stock?
The market cap effects a stock because it determines where it will be listed on the London Stock Exchange. Large companies with a market capitalisation of over £4.4 billion are listed in the FTSE 100. This is a list of all the largest publicly floated companies in the UK. The FTSE 100 index is popular with institutional investors such as pension funds or with investors who are looking for shares with a high dividend yield.
What are large-cap stocks?
In the UK large cap stocks are usually defined as being those in the FTSE 100 index. This index is listed on the London Stock Exchange and includes the top 100 largest UK companies. The size of these companies is determined by their market capitalisation. In the US market large stock caps are usually classified as companies with a market cap of over $10 billion.
Large cap companies included in the FTSE 100 range significantly in size or market cap. The largest company is Shell Plc, with a capitalisation of £148.9 billion and the smallest company is Royal Mail, with a capitalisation of £4.4 billion. It is possible for a company to drop out of the FTSE 100 if their market capitalisation reduces or another company overtakes it.
Large companies are usually older and more stable than smaller companies. They have proved themselves over time and have often survived several economic downturns. Large companies may have less opportunity to grow their share price than smaller companies. That’s because they may be at the top of their growth cycle.
What are mid-cap stocks?
In the UK mid cap stocks are usually defined as being these in the FTSE 250 index. This index is listed on the London Stock Exchange and sits below the FTSE 100. It includes companies from the 101st largest to the 350th largest in the UK. In the US market mid cap companies are usually classified as those worth between $2 and $10 billion.
Mid cap companies included in the FTSE 250 range from Howden Joinery, with a capitalisation of £4.4 billion, to Cineworld, with a capitalisation of £517 million. It is possible for a company to drop out of the FTSE 250 if their market capitalisation reduces or another company overtakes it.
Mid caps sometimes have more growth potential than larger companies. As a whole, mid cap stocks tend to deliver better returns and share price growth than larger companies. However there is a large amount of variability from company to company. They may be a small, growing company with big potential. However, they may also operate in a small niche that is in decline with no big growth prospects.
What are small-cap stocks?
In the UK smaller companies are listed on the FTSE Small Cap Index or the Alternative Investment Market (AIM) In the US market small stock caps are usually classified as those with a market cap between about $300 million to $2 billion. Small companies can also be privately owned and are not always listed on the stock exchange.
Small companies can be younger and sometimes serve niche markets and new industries. These companies are often considered higher-risk investments as they tend to fluctuate more in price than large cap shares. Small cap shares can be harder to sell than more mature and larger companies, especially if they are not listed. Smaller companies also have fewer resources so may be more sensitive to economic recessions.
However small cap companies can also offer exciting investment opportunities. As a whole, small cap shares tend to grow more than large cap shares over time. The FTSE Small Cap Index has increased in value by 40.0% in the last 5 years whereas the FTSE 100 Index has increased by 5.2% during the same period.
What is the Alternative Investment Market (AIM)?
In the UK, mid and small cap stocks are also listed on the Alternative Investment Market (AIM). It is part of the London Stock Exchange that is designed to help smaller companies list and raise money through issuing shares. The rules for listing are more flexible, compared with the main London Stock Exchange stock market.
How to use market cap
Market cap is useful because it may help you understand and evaluate a company. In general, larger companies are more likely to be at the top of their growth cycle and may have less room for share price growth than smaller companies. On the other hand, larger companies are more likely to pay dividends which can either be taken as income or reinvested in more shares.
Many investors aim for a diversified portfolio which includes a mixture of large, mid-cap and smaller companies. On average large companies tend to have slightly more stable share prices although they may also grow at a slower speed.
If you are aiming for growth then you may wish to choose some smaller and mid-cap companies or smaller and mid cap investment funds as part of your portfolio.
How is the market cap established?
Market cap is established when a company lists on the stock exchange. This process is known as an initial public offering (IPO). Specialist underwriters will work out the company’s value and decide how many shares will be offered to the public for what price. For example, if a company’s value is worked out as £200 million and they want to offer 10 million shares, the initial share price will be £20.
Once the company has listed, the share price is determined by supply and demand for its shares and investor confidence in the company. Investors take into account the future growth prospects of the company as well as wider market conditions. Share prices often fluctuate significantly and are volatile for the first few months after listing.
How does market cap affect investment strategy?
Knowing a company’s market cap can affect your investment strategy. This is because many investors aim for a diversified portfolio that is spread between large, medium and small companies. On average, larger companies tend to grow their market cap at a slower speed than smaller companies. However the share price also tends to fluctuate less over time so they are generally considered slightly lower risk than smaller companies.
Understanding market cap will give you information about your investments. Most investors aim for a diversified portfolio that’s spread across large, mid and small cap companies.
If a company has a large market cap, it may be at the top of its growth cycle. However this doesn’t always mean it’s not worth investing. Large cap companies tend to have more stable share prices over time and also often pay generous dividends.
Frequently asked questions
All investing should be regarded as longer term. The value of your investments can go up and down, and you may get back less than you invest. Past performance is no guarantee of future results. If you’re not sure which investments are right for you, please seek out a financial adviser. Capital at risk.
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