Market capitalisation: what a company's shares are worth, and what it does not tell you

Market capitalisation is one of the first pieces of information shown on a stock's page. It is used to rank companies by size: we speak of small caps, mid caps and large caps. But this figure invites shortcuts: a large capitalisation is not automatically "safer", nor a small one automatically "riskier" or "more promising". This article explains what market capitalisation measures, how it is calculated, what the categories cover and its limits.

Market capitalisation: definition and formula

Market capitalisation is the market value of all the shares of a listed company:

Market capitalisation = share price × number of shares issued (or, depending on the convention, outstanding)

Fictitious example. A company has 200 million shares and its price is €25. Its capitalisation is 200,000,000 × 25 = €5 billion. If the price rises to €30, the capitalisation goes to €6 billion, without a single euro having changed in the company's accounts: it only reflects what the market is willing to pay at a given moment.

Capitalisation and enterprise value: two different things

Market capitalisation measures only the shareholders' share. It ignores debt and cash. For the value of the entire company, enterprise value is used, which adds net debt: see EV/EBITDA. Two companies with the same capitalisation can have very different economic sizes if one is heavily indebted.

The categories: small, mid and large caps

Companies are usually classified in three groups:

Large caps: the biggest listed companies.
Mid caps: an intermediate size, between the two.
Small caps: the smallest listed companies, and below them the micro caps.

There is no single official threshold. Boundaries vary by index, trading venue and provider, and they change with the level of the markets. Each index or provider publishes its own limits, which should be checked before comparing. A company can change category simply because its price rises or falls.

What size changes in practice

Size comes with tendencies, never rules:

Liquidity. Large caps are generally traded more: it is easier to buy or sell without moving the price. Small ones are harder to trade in size.
Volatility. Small caps often have more pronounced price moves, but this is not a constant.
Available information. Large companies are followed by more analysts. Small ones less so, which leaves more room for uncertainty.
Diversification of activities. Large companies are often present in several markets; small ones more concentrated on one activity.

These tendencies are neither a guarantee of solidity for some nor of growth for others.

Free float: the share that is actually tradable

Market capitalisation counts all shares, including those held long term by a reference shareholder or the founding family. The free float is the share of stock actually available for trading on the market. A company with a large capitalisation but a small free float can be illiquid. Several indices, incidentally, weight their constituents by free-float capitalisation rather than total capitalisation.

The limits of capitalisation

It depends on the day's price. A high capitalisation can reflect passing enthusiasm.
It says nothing about the quality of the company, its profitability or its debt.
It does not replace fundamental analysis: see how to analyse a stock.
It varies from one source to another, depending on the date of the price and the number of shares used.

In a portfolio, the split between small, mid and large caps is part of diversification: see how to diversify a stock portfolio.

Key takeaways

Capitalisation = price × number of shares.
It measures the market value of the shares, not the value of the entire company.
The small, mid and large cap categories have no single official threshold.
Size comes with tendencies (liquidity, volatility, information), never guarantees.

This article is for information and education only and does not constitute personalised investment advice. The figures in the examples are fictitious and illustrative.