What is Market Capitalisation and How To Calculate It

Last Updated on June 17, 2025 – by Muskan Sinha

Market Capitalisation is the total value of a company with respect to their shares. It is a major parameter to evaluate the current position of a company in the stock market. Market cap helps investors understand the worth of a company like it is big or small. Basically, companies are classified into three main categories that is Large Cap, Medium Cap and Small Cap based on their market capitalisation. 

The market capitalisation also enables investors to understand the risk factor involved before investing in the shares of a company. It helps investors know about the possible growth potential and stability of the company. Market cap is important for investors as this shows the overall performance of the company, it help investors to make informed decisions before investing. 

How is Market Capitalisation calculated?

Market Capitalisation is calculated using a simple formula which is given below:

     “Market Capitalisation = Share price x Total Number of Outstanding Shares“

Here, share price means the current  price of one share in the stock market. The outstanding shares means the total number of shares that the company owns. 

Example: Lets say, there are 10 million shares with a company and the price of each share is $ 25. Then Market Cap of a company becomes 10,000,000 x 25 = $250,000,000. 

It is important to note that this formula only helps investors to know how much the entire company is worth today. It does not take into account the debts, assets, or actual profits of the company. 

Types of Companies based on Market Capitalisation 

As discussed above, there are three main classifications of companies based on market cap. These are as follows:

1. Large Cap 

The companies with a market cap over $10 billion are termed as large cap companies. They are the most stable group of companies and have already reached the pinnacle of growth. Investing in these companies means there is lower risk involved but the returns are also moderate. 

Since these companies are stable, there is no sudden change expected in the prices of stock. Large cap companies are best for people who have a lower risk tolerance and 

are looking for stable and long term investment with moderate returns. 

2. Medium Cap 

The companies with a market cap between $2 billion and $10 billion are termed as medium cap companies. These companies are known to be more volatile as compared to the large cap companies. These companies are still growing and establishing their place in the market which means the growth potential is really high. 

However, the risk involved in these companies is also relatively high when compared to large cap companies since they are not yet stable in the market. The returns investors get by investing in medium cap companies is also high. People who have a higher risk tolerance and want to balance between stability and growth, can find investing in these companies beneficial. 

3. Small Cap 

The companies with a market cap between $300 million to $2 billion are termed as small cap companies. Since these companies are yet to establish themselves in the market, the risk involved with them is extremely high. However, the investors can expect great returns, the highest if compared with the rest. 

The small cap companies are also known to be highly volatile and have low liquidity. Investors should be prepared to face the unpredictability in these companies. The growth potential of these companies is the highest as they are still making their place in the market. People who have a high risk tolerance and are eager for growth can invest in the small cap companies. 

Importance of Market Capitalisation 

There are many reasons why knowing the market capitalisation is important for investors. They help them choose the right shares to invest in. The following points discusses the importance of market capitalisation:

1. Measures the size of the company 

Market cap can help investors know how big and valuable a company is. Since market cap gives the total value of a company’s outstanding shares, investors can make informed decisions about their investment. 

2. Helps assess the risk and stability 

As discussed above, market cap gives a detailed picture of how the company and its share behaves in the market. Depending upon the three main classifications of companies – large cap, medium cap and small cap, investors can know the stability and potential risk involved with them. 

3. Helps in comparison 

When comparing two companies, investors not only get to know about the size of the companies, but also the overall growth potential and risk involved. Some companies may have the same revenue but very different market cap. Thus, it is crucial to know the market cap to analyze the stats better. 

4. Affects the index 

Market cap is used to analyze how much weight to give to different companies. The companies with a larger market cap get the highest weightage in the index, influencing its overall performance. 

5. Acts as an indicator of market sentiment 

A rising market cap can show strong investor confidence in a company whereas a falling market cap can be alarming and mean weaker performance. A change in market cap can mean a shift in the market trends. With the help of market cap, an investor can understand market sentiments such as growth, risk, stability and more, and make informed decisions.

Factors Impacting Market Capitalisation

There are several factors that can impact the market cap. These are as follows:

• Financial performance – A company’s revenue, growth and profit can influence the market cap of the company. 
• Regulatory changes – If there happens to be a change in the government policies, laws and regulations, then market cap can get impacted too.  
• Global events – Geopolitical changes, natural disasters and global economic shifts can also lead to a change in market cap. 
• Competition – Market share, industry dynamics and performance of competitor brands can change the market cap of a company. 
• Economic condition – Inflation, interest rates and other economic factors can impact the market cap of a company.

Conclusion 

It can be understood now that market capitalisation plays an important role in helping investors choose the best companies to invest in. Not only does it give the value of a company’s outstanding shares but also helps investors assess the risk involved, stability and growth potential of their investment. However, investors should know that market capitalisation only gives the market perception of the company and not the actual assets or profits of the company. 

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