What is Market Capitalisation?

Market capitalisation, often referred to as market cap, is the total market value of a company’s outstanding shares of stock. It is a quick and effective way to estimate a company’s size and how the market values its equity. 

In this blog, we’ll explain the meaning of market capitalisation, its calculation, and the differences between market cap and other valuation metrics. Keep reading!

Market Capitalisation Meaning

Market capitalisation (or market cap) is the total value of a company’s outstanding shares in the stock market. It represents how much the market values a company’s equity and is calculated by multiplying the current share price by the total number of outstanding shares. In simple terms, market capitalisation is the market’s assessment of a company’s size.

For investors, market cap is a key metric. It helps gauge a company’s scale, growth stage, and risk level. Unlike earnings or revenue, market cap reflects what investors are willing to pay for the company based on perceived value and future potential. It also influences a stock’s liquidity, volatility, and role in investment strategies like portfolio diversification.

Market Cap Categories

Based on market capitalisation, companies are grouped into three major categories:

Category	Market Cap Range (Indicative – Indian context)	Profile
Large-cap	₹20,000 crore and above	Established, stable companies with steady returns
Mid-cap	₹5,000 to ₹20,000 crore	Companies with growth potential but moderate risk
Small-cap	Below ₹5,000 crore	High-growth, high-volatility firms in early stages

These categories are reviewed periodically and may vary slightly depending on the benchmark or regulatory body. Classifying companies based on market cap helps investors diversify across different market segments and balance their portfolios according to their investment horizon and risk tolerance.

How to Calculate Market Cap?

Market capitalisation (market cap) is a simple but essential metric that tells you the total value of a company’s outstanding shares in the stock market. It helps investors quickly understand the company’s size and market value.

The standard formula for calculating market capitalisation is:

Market Cap = Share Price × Total Number of Outstanding Shares

This means you multiply the current market price of a single share by the total number of shares the company has issued (excluding any shares bought back or held as treasury stock).

Example of Market Capitalisation Calculation

Suppose a company’s share is trading at ₹500, with 10 crore (100 million) outstanding shares.

Market Cap = ₹500 × 10,00,00,000 = ₹5,000 crore

So, the company’s market capitalisation would be ₹5,000 crore, placing it in the large-cap segment based on Indian market classifications.

Why Market Capitalisation Matters

Market capitalisation reflects a company’s size and value, helping investors understand potential risk, return, and volatility. Unlike other financial metrics focusing on earnings or debt, market cap gives a quick snapshot of how the market values a company’s equity at a given time.

Additionally, market cap is often used to categorise companies into large, mid, and small-cap segments. These classifications help investors:

• Balance risk and return: Large-cap stocks tend to be more stable, while small- and mid-cap stocks may offer higher growth potential but with greater volatility.
  
• Build diversified portfolios: Investing across market caps spreads risk across different company sizes and growth stages.
  
• Align with investment goals: Conservative investors may prefer large-caps, while aggressive investors may lean towards small- and mid-caps for higher upside.

Market Cap vs Other Financial Metrics

While market capitalisation reflects the market’s current company valuation, it should not be used in isolation. Here’s how it compares:

• Market Cap Vs Earnings Per Share (EPS): EPS shows profitability; market cap shows total market value. A high market cap doesn’t always mean high earnings.
  
• Market Cap Vs Price-to-Earnings (P/E) Ratio: The P/E ratio uses market cap-derived price to assess valuation relative to earnings.
  
• Market Cap vs.​​ Enterprise Value (EV): EV includes debt and subtracts cash, offering a fuller picture of what it would cost to acquire the business. It is more comprehensive than what market cap is in assessing company value.

Factors Influencing Market Capitalisation

Market capitalisation (market cap) reflects the total value of a company’s outstanding equity in the stock market. While the formula is simple, several dynamic factors influence both equation components. Understanding these drivers is key to interpreting company market value changes over time.

Here are the key factors that impact market capitalisation:

Stock Price Fluctuations

The most direct factor affecting market cap is the company’s stock price movement. Prices rise or fall based on market demand and supply, which are influenced by earnings reports, economic trends, sector performance, and overall investor behaviour.

Number of Outstanding Shares

Any change in the number of shares a company has issued, through events like stock splits, buybacks, or new equity issuance, directly affects how the market cap is calculated. For example, if a company issues additional shares, the market cap could increase even if the share price remains unchanged.

Company Performance and Investor Sentiment

Strong financial results, growth outlook, and positive news tend to boost investor confidence, leading to a higher stock price and market capitalisation. On the other hand, negative sentiment due to poor earnings, management issues, or regulatory challenges can drive the stock price and market cap down.

Market Cap vs Enterprise Value

While market capitalisation (market cap) is often the first metric investors check to gauge a company’s size, it doesn’t tell the full story. Enterprise Value (EV) goes further by factoring in a company’s debt and cash positions, offering a more complete view of its financial value. This is especially useful in mergers, acquisitions, and valuation comparisons. 

Here’s a quick comparison of the two:

Aspect	Market Cap	Enterprise Value (EV)
Definition	Total equity value based on current share price and shares outstanding	Total value of the business, including debt and excluding cash
Formula	Market Cap = Share Price × Outstanding Shares	EV = Market Cap + Total Debt – Cash and Cash Equivalents
Includes Debt and Cash?	No	Yes – includes debt and subtracts cash
Purpose	Measures company size and equity market value	Measures total business value and acquisition cost
Best Used For	Comparing public company size and categorising into large-, mid, and small-cap	Valuing companies for M&A, debt analysis, or comparing capital structures
Investor Use Case	Basic screening, index placement, and volatility estimation	Advanced analysis for deal-making, leveraged buyouts, or assessing total value

When to use each metric:

• Use market cap to assess a company’s size in the stock market, or when comparing stock performance and risk among peers.
• Use enterprise value to evaluate a company’s worth, especially when debt levels significantly impact its financial health.

Conclusion

Understanding market capitalisation is fundamental for making informed investment decisions. It helps you identify whether a company is large, mid, or small-cap, which can, in turn, guide your risk strategy and asset allocation. While market cap doesn’t capture everything about a company’s health, it’s a reliable starting point for analysis.

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FAQs

What is the formula to calculate market capitalisation?

The formula for market capitalisation is:

Market Cap = Share Price × Total Number of Outstanding Shares

This helps determine a company’s overall market value.

Why is market cap important for investors?

Market cap gives a quick estimate of a company’s size, risk level, and market standing. It helps investors compare companies and build a balanced portfolio across large-cap, mid-cap, and small-cap stocks.

How does market cap affect stock performance?

Market capitalisation can influence price stability, liquidity, and growth potential. Large-cap stocks tend to be more stable, while small-cap stocks may offer higher growth but come with greater volatility.

What is the difference between market cap and enterprise value?

While market cap reflects a company’s equity value, enterprise value includes market cap plus debt minus cash. Enterprise value offers a complete picture of a company’s total valuation, especially for acquisition purposes.

Can a company change its market cap category over time?

Yes. As a company’s share price and number of outstanding shares change, its market capitalisation may shift from small-cap to mid-cap or mid-cap to large-cap, depending on performance and market conditions.

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Disclaimer: Investments in securities markets are subject to market risks. Read all the related documents carefully before investing. The securities quoted are exemplary and are not recommendatory.