Protecting your investment start before you even make the investment this can be really difficult because the market is constantly changing and although a lot of us understand that the value of a share is constantly changing in the stock market is a volatile place not many people know whether or not the market cap of a company changes daily.
The market cap is constantly changing. This means that yes, it does change on a daily basis. Every time the value of a stock declines or increases so will the market cap. These changes are often small. For the market cap to change significantly it usually means that a company is buying back a significant amount of stocks.
There are a lot of factors that we need to consider as to why the market cap changes and I think that is what we need to discuss in this article. We are also going to take a look at just about everything you need to know about market capitalisation. So, for everything you need to know, keep reading.
Understanding Market Cap: What Is Market Capitalisation?
Market capitalization refers to the total value of all the outstanding shares of a company. Outstanding shares are those that are still held by investors. To simplify this, let’s use an example. I want to use a fictitious example followed by a real-world example. This should make it easy to understand what the “market cap” refers to.
If a company has 5 million shares outstanding and each share is valued at $50 that means that the market cap for that company is $250m. You simply multiply 5 million by $50 and that is the market cap.
Now, let’s use a real-world scenario. Because the market is constantly fluctuating, we cannot give you the exact numbers, so this is correct as of March 2021. Right now TESLA stock is fluctuating between $550 and $600 per share. As of their last report, they have a total of 959.85M shares outstanding.
The shares are held by funds, government schemes, investors, and insiders. What we mean by insiders is people who work for Tesla and who own stock as part of their benefits. At the time of writing this article, TESLA insiders hold 19.99% of outstanding shares. (insider owned shares do not count towards market cap).
Multiply Tesla’s share price by their outstanding shares and you will get close to $541.45B which is what their market cap is while writing this article.
Kind of easy to understand right? it is important to remember that the market cap can be used as a measurement of a company’s current success. In fact, it is often used during acquisition. If a company is being acquired then the person or institution that is buying the company will often look at the market cap.
With all of that being said, a good investor or even someone who is trying to acquire a company will not only rely on the market cap. They will use enterprise value and market cap to determine whether or not said company will make for a good investment.
The 5 Types Of Market Caps
When doing your research you might come across words such as “low-cap, mid-cap, or large-cap stocks”. This basically just refers to a company’s current market cap. Basically, it refers to the total market cap that a company has on the market.
Let’s take a look at a table that shows what the levels of each market cap is. Feel free to bookmark this page to keep this table as a reference.
|Market Cap Range||Market Cap Type||Example|
|Under $300 million||Micro-cap Stocks||Atlantic Power Corporation ($260m)|
|$300 million to $2 billion||Small-cap Stocks||ACM Research ($1.73b)|
|$2 billion to $10 billion||Mid-cap Stocks||Emergent Biosolutions Inc ($4.70b)|
|$10 billion to $200 billion||Large-cap, also known as High-cap Stocks||AbbVie Inc. ($194b)|
|Over $200 billion||Mega-cap Stocks||Microsoft Corporation ($1.77T)|
There are stocks that are classed as Nano-cap, which have market caps under £50 million. These companies are most likely to be penny stocks.
Can Market Cap Change Daily?
The simple answer is yes, the market cap does change daily. In fact, a lot of people will just leave it there and say… “Well, yes, the market cap changes daily” but in reality, it is not that simple. This is because it is hard for outsiders to determine exactly how many shares are outstanding at the end of each day.
If a company’s stock is currently being traded on the market then yes, the cap changes daily. However, the market cap can only truly be determined when the company releases its financial reports.
What this means is that it will be hard to tell what the market cap of a company is currently until it shares this information with the public. With that being said, there are brokers and financial experts that keep track of this and so, if you look at Google Finance, the market cap will be updated daily.
The market is constantly fluctuating and the value of shares within a certain stock will hardly ever remain at a fixed price point for too long. With each fluctuation in price, the market cap will change.
The market cap for large-cap stocks is more stable than small-cap stocks. So, when it comes to small-cap stock or even a mid-cap stock, you might see more significant fluctuations in market cap than you would with large-cap stocks.
What Causes The Market Cap To Change?
There are 3 main factors that can affect the market cap and cause it to change on a daily basis. These are:
- The value of shares.
- When the company buys back shares and removes them from the market.
- Stock dilution.
By now, you should have a good idea of what causes the market cap change. Firstly, we need to talk about the value of each share. A company will determine how many shares they will issue. The value of a share can not be determined by the company once it enters the market.
So, if the value of each share drops so does the market cap of that company. If the value of those shares increases then so does the market cap. The more significant these fluctuations are the more drastically the market cap changes.
Another way in which the market cap can change is when the company decides to buy back its shares. Once a company does this, those shares are no longer outstanding and the company can either decide to retire them or hold them within the treasury.
Regardless of what the company decides to do with the share once they have been bought back, they are no longer in the market, and therefore, they no longer contribute to the market cap.
Stock dilution is something that requires an in-depth discussion. So, we have a section dedicated to that subject in this article.
Does A Stock Split Increase The Market Cap?
A stock split does not immediately affect the market cap. This is because the market value does not change with a stock split. If the value of the stocks continues to increase then the market cap will increase but this has no reliance on a stock split. Let’s use an example to explain this.
Let’s say a company has 1 million shares outstanding and the value of each share is $100.
This means that the total market cap is $100 million. If the company decides to do a ‘share split’ they will then double their outstanding shares to 2 million, however, the value of each share will be halved, and now each share will be valued at $50. The market cap will remain the same as 2 million shares valued at $50 per share still comes to this:
2 million x $50 = $100 million market cap
This creates liquidity and makes buying into the stock easier for potential investors. However you can buy a fraction of a share when using brokers such as eToro, Trading 212, M1 Finance and Webull. You can see which ones I use on our resource page.
I would just like to add that a stock split reversal can be done on a stock split which basically does the opposite of a stock split. However, the total value of your shares will not be changed and neither will the market cap.
Does Dilution Affect Market Cap?
Before we get into it, there are some people who might confuse dilution with a stock split. In reality, these are two completely different things. A stock split is where new shares are given to current shareholders relative to the value of their total share value. It basically splits your stock into two or three. The value of each share changes accordingly but your total value does not change at all.
Stock dilution is when new shares are added to the market. It is a sign that a company is trying to raise more money. This can significantly impact the market cap. This impact can either be positive or negative even though it seems like it should be positive, right?
Stock dilution can cause panic amongst investors. When you add in the fact that there is now more supply on the market, the value of each share should drop significantly. Because supply drives demand, the more an asset is available, the less valuable it becomes.
It is hard to say which direction the market cap will go in the initial phase of dilution. It is safe to assume that the price of each share will drop especially in the initial phase of the dilution. However, if the company is still seeing growth then the share price will increase eventually.
That means that in the long run, the market cap will increase as the new shares are being sold on the market.
How Does Market Cap Affect Price?
The market cap can indicate how healthy a company is on the stock market, this could indirectly affect price-per-share. However the answer to this question is no, the market cap should not affect the price of each share.
Once a company has issued its shares, the market cap actually becomes dependent on the share price. So, to answer this question, it works the complete opposite way.
With all of that out of the way, there are so many variables that come into play when it comes to the value of a share and the market cap. Anyone who knows what they are talking about can sit for days and think of every single variable and every single scenario but that doesn’t really help you.
The easiest way to think of it is how we explained it in this article. The market cap does not determine the price of shares but the value of each share can determine the market cap. Rather stay away from trying to look at every single variable.
Are Large-Cap Stocks A Good Investment?
Large-cap stock means that the company has a market cap of $10billion or more. To invest in a large-cap stock is seen as a conservative investment. This is because although the company is more likely to see growth, that growth is often slow. The company is often established which means it is less likely to drop into financial difficulty.
If the company pays dividends then those dividends will be consistent. During a bear market, a large-cap stock is less likely to be affected. Unfortunately, the same can be said during a bull market. While smaller cap stocks will be more heavily affected by both of those markets.
Because smaller cap stocks are more likely to be affected by dips in the overall economy, they become more volatile during bear markets. This can be combated by the potential of huge growth during a bull market. Large-cap stocks tend to stay healthy throughout mild changes in the economy, but it also leads to slower growth in times of good wealth.
So, if you are looking for a long-term investment where you plan to collect dividends and want small growth every year, then a large-cap stock is the best option for you. You can check which large-cap & small cap stocks I invest in on the My Holdings Page.
Are Small-Cap Stocks A Good Investment?
Small-cap stocks are stocks with a market cap between $300million and $2billion. These stocks can be heavily affected by a bear market. In volatile markets, small-cap stocks are often the first to drop.
This means that they are riskier than mid-cap or large-cap stocks. They are seen as high-risk investments. However, there is always the potential for these investments to see huge growth in short periods of time. This is because they have the room to grow.
Having room to grow also means that during a recovery phase of the market, they are also usually the first to start recovering.
If you want to take a little bit of a risk and you have money to do so, I would say that small-cap stocks can be a good investment. This is true as long as you do as much research as possible into the financial past & company goals, to make sure the stock has the potential to reach the level of growth you require.
You could see large returns but at the same time, you could lose money so make sure that you invest money that you can afford to lose. Find out what speculation is in our recent article.
How To Find The Market Cap of a Publicly Traded Company?
The importance of a company’s market cap cannot be overstated. when doing your research you always need to look at this metric. Now, I’m not saying it should be the metric upon which you base any of your decisions on, however it can be an influence.
The best way to find the market cap of a stock is to simply go to Google finance. Type in the stock that you are looking for and scroll down to a section called “key stats”.
There you will find a wealth of information about the stock including its current market cap.
If you notice that the market cap of a company is changing significantly you should take note. If it is decreasing this could mean that a company is buying back a significant amount of shares. This will drop the supply on the market which could be a good thing for current shareholders.
If the market cap is increasing you might want to take a look at what the value of each share is doing and then you want to take a look to see if the company has maybe entered in stock dilution. Use all of these data points to make an informed investment or refrain from investing if you suspect something is wrong.