Total market capitalization is a measurement for the size of a company within the market as determined by the value of its outstanding shares. To calculate this amount, the amount of outstanding shares that a company has is multiplied by its current stock price. Depending on the amount of total market capitalization, stocks are classified as big cap, mid cap, and small cap, with even finer distinctions available in those groupings. These classifications signify to investors the size of the company and the amount of risk involved with investing in them.
Many people make the mistake of thinking that the size of a company is directly related to the stock price. In fact, a company can have a huge stock price that is simply a reflection of a lack of available shares, while another company may have a relatively small current price due to an excess of shares available to be bought by investors. The total market capitalization of a company is one of the best indicators of a specific company's standing in the market.
As an example of how to calculate the total market capitalization, also known as market cap, imagine that a company is trading at a current price of $20 US Dollars (USD) per share. That same company has 100,000 shares available to the public. To arrive at the total market cap, $20 USD is multiplied by 100,000, which yields a total amount of $2,000,000 USD.
The three main classes of stocks in terms of total market capitalization are big cap, mid cap, and small cap. Although different investment firms may have distinct guidelines for what constitutes each of these groups, a big cap stock is generally a stock with a total market cap of more than $10 billion USD. Mid cap stocks usually have a range of $2 billion USD to $10 billion USD, while small cap stocks have a market cap of less than $2 billion USD. These stocks can be broken down even further by investors, as big caps can give way to mega caps and small caps can be narrowed to micro caps.
Investors use total market capitalization as a way to judge what to expect from the stocks in which they invest. For example, big cap stocks are usually stable investments that represent very little potential for growth. On the other hand, small cap stocks can be potentially lucrative but are also somewhat volatile. There are exceptions to these rules, but market cap provides a good barometer for investors to make their choices.