You must have heard this…
“Reliance is a large-cap company’
‘This is a small-cap stock ‘
You might be doubtful what is this “cap” which is being talked about.
I am going to explain ‘Market cap’ in simple terms.
What is Market Cap?
Market cap is a short term used for Market Capitalisation. It is the total market value of the outstanding shares of the company.
Market Cap = Current Share Price × Total Outstanding Shares
- Current share price is the price at which the share is trading on a stock exchange.
- Outstanding shares are the number of shares currently held by its shareholders and are in circulation in the market.
Let’s understand it with help of an example:
Imagine a company with 10 lakh shares outstanding.
If the share is trading at a market price of ₹100
Market cap = ₹10 lakh x 100
= ₹10 crore
But, what does it mean in real life?
It means that at the current market price, the market is valuing all of the company shares at ₹10 crore.
So, market cap is about the whole company and not just one share.
Why can’t you just look at the share price?
Because it will not give you the right answer.
Suppose:
Market price of the share of company A = ₹500
Market price of the share of company A = ₹100
Does this mean company A is bigger?
No, it is not necessary
We need to know the number of outstanding shares the company has.
Suppose Company A has 10 lakh shares and Company B has 1 crore shares.
Then:
Company A:
10 lakh shares × ₹500 = ₹50 crore market cap
Company B:
1 crore shares × ₹100 = ₹100 crore market cap
Even though Company B has a lower share price, its market cap is higher.
So, share price alone doesn’t tell you the size of a company.
The next question that could be in your mind is – does it change?
Does the market cap change?
Actually it does.
It is MOSTLY because of the change in the market price of the share.
Since the market price of the share changes, the market cap of the company also changes.
For example the market price of company A goes to ₹1000
The market cap of the company will also change.
Company A:
10 lakh shares × ₹1000 = ₹100 crore market cap
It just doubled from ₹50 crore to ₹100 crore.
But, can the number of outstanding shares change?
Yes, it is possible.
The number of outstanding shares can also change because of things such as new share issuance, buybacks or certain corporate actions.
Conclusion
Market cap is simply the current market price of a company’s share multiplied by its outstanding shares.
It gives us an idea of how large a company is in terms of its market value, and because the share price keeps changing, the market cap can also change.
But this brings us to another question:
If companies have different market caps, how do we decide whether a company is large-cap, mid-cap or small-cap?
That’s what we’ll understand in the next article.
Thanks for reading till the end – Isha Singla(About)
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