How Is Market Cap Calculated? Market Capitalization Explained

Market capitalization is a company's share price multiplied by the number of shares it has outstanding: what the stock market values the whole company's shares at, right now. It moves every time the share price moves, and it is one of the most common ways to compare the size of two companies. But it is not the same as what it would cost to buy the whole business.

How it works

The formula is simple: share price multiplied by shares outstanding, which is the total number of shares a company has issued and that are currently held by investors. Multiply the two and you get the dollar value the market currently places on all of those shares combined.

Because share prices move continuously while markets are open, market cap changes right along with them, tick by tick. It also changes when the share count changes. A buyback, where a company repurchases its own shares and retires them, shrinks the share count. If the price holds steady, a smaller share count means a lower market cap even though nothing about the day-to-day business has changed.

Investors often sort companies into size labels based on market cap: large-cap, mid-cap and small-cap. A common convention places large-cap above $10 billion, mid-cap between $2 billion and $10 billion, and small-cap below $2 billion. These are not official rules. Different index providers draw the lines in different places, so the same company can fall into different buckets depending on whose convention is used.

Market cap only values the shares. It leaves out a company's debt and cash entirely. A related measure, enterprise value, adds a company's debt and subtracts its cash from market cap, which is meant to approximate what it would actually cost to acquire the whole business, including paying off what it owes and accounting for what it holds in reserve. Market cap alone cannot tell you how leveraged a company is or how much cash cushion it has.

A higher share price does not mean a bigger company. To see why, take two illustration companies with round numbers used only to explain the idea. A company with 100 million shares trading at $40 has a market cap of $4 billion, from 100 million times $40. A second company with 1 billion shares at $10 has a market cap of $10 billion, more than double the first, even though its share price is a quarter of the other's. Share count matters just as much as price.

A worked example with real figures

The table shows two real companies worked through the same formula. NVIDIA Corporation (NVDA) has a share price of $216.47 and 24.10 billion shares outstanding, which multiplies out to a market cap of $5.22 trillion. Microsoft Corporation (MSFT) has a share price of $531.87, more than double NVIDIA's, but only 7.43 billion shares outstanding, giving it a market cap of $3.95 trillion. Microsoft's much higher per-share price does not make it the bigger company by this measure, because its share count is far smaller.

The comparison shows the same point as the illustration above, now with real numbers: share count can outweigh share price when it comes to total size. Reuters reported that Nvidia's market capitalization has become the largest of any company in the world, having climbed sharply from a much smaller figure a few years earlier. The Wall Street Journal reported that Microsoft has been approaching a $4 trillion market cap around the same period, consistent with the figures shown here.

Neither figure says anything about debt, cash, or what it would cost to buy either company outright. For that, a reader would need to look at enterprise value, which builds on market cap but is a separate calculation.