Market Capitalisation: Definition, Types, & How to Calculate?

Market capitalisation can also be considered the overall value of a company’s outstanding shares. The market cap is calculated by multiplying the CMP by the total shares. So let us understand further what Mcap is, how to calculate it, the formula, types, etc.

Key Highlights:

• Market capitalisation is calculated by multiplying the current market price (CMP) by the total number of readily available shares.
• Companies are then categorised into three segments of large-cap, mid-cap, and small-cap based on their level of market capitalisation. 
• The Market Capitalisation-to-GDP ratio is used to gauge whether the overall stock market is undervalued or overvalued. 

What is Market Capitalisation?

Market capitalisation, commonly known as market cap, is the total market value of a company's outstanding shares. It represents what the stock market believes a company is worth at a given point in time based on its current share price.

Investors leverage it to make peer comparisons, evaluate the company's market position, and categorise it as large-cap, mid-cap, or small-cap. Although it does not reflect actual book value, it offers a quicker view of how it is perceived in the market.

How to Calculate Market Capitalisation?

One can calculate market capitalisation by multiplying the current share price by the total number of outstanding shares.

Formulae: Market Capitalisation (MCAP) = CMP x Total Number of Outstanding

Let's understand the formulae with the help of some examples,

Example 1: If a company has three crore outstanding shares, and each share’s CMP is Rs 300, the company’s market capitalisation would be

3,00,00,000 x 300 = Rs 900 crore.

Example 2: If a company has two crore outstanding shares, and the CMP of each share is Rs 200. The company’s market capitalisation would be

2,00,00,000 x 200 = Rs 400 crore.

What are the Different Types in Market Cap?

We classify companies by market capitalisation. This enables you to understand how big (or small) a company may be its growth potential and your investment’s risk profile.

• Large Cap: Large Cap Companies have a Market Capitalisation of Rs 20,000 crore or above. These companies are well-established ones with significant market share.
• Mid Cap: A mid-cap company has a Market Capitalisation between Rs 5,000 and Rs 20,000 Crore.They are fast-growing companies that focus on Expansion by top management to increase their market Share.
• Small Cap: Small-cap companies are defined as having a market capitalisation of less than Rs 5,000 crore.They have great growth potential but may struggle to sustain themselves during economic slowdowns.

What is the Importance of Market Capitalisation?

Market capitalisation helps investors understand a company's size and its position in the stock market. It is one of the first metrics used to compare companies and evaluate investment opportunities.

• Measures Company Size: It classifies companies as large-cap, mid-cap, or small-cap based on their market value.
• The benefit of Risk Evaluation: In general, large-cap companies tend to have more stable performance than small-cap companies but investing in smaller businesses entails greater risk and offers greater potential for returns.
• Helpful in Making Investment Choices: Investors use market capitalisation to identify stocks that suit their needs and risk tolerance.
• Useful for Comparison: It is an easy way to compare businesses, regardless of their per-share price.
• Helpful in Building Portfolio: By investing across several market-capitalisation categories, it is possible to create a portfolio with the perfect balance of risk and potential returns.

What Does the Market Capitalisation-to-GDP Ratio Indicate? 

The Market Capitalisation-to-GDP ratio, also known as the Buffett Indicator, compares the total value of a country's listed companies with its Gross Domestic Product (GDP). It is widely used to assess whether the overall stock market is fairly valued, undervalued, or overvalued relative to the size of the economy.

Formula: Market Capitalisation-to-GDP Ratio = (Total Market Capitalisation ÷ GDP) × 100

Market Capitalisation vs Free Float Market Capitalisation

Free float market capitalisation and market capitalisation may measure a company's value similarly, but there is a discrepancy in the shares included in the calculation. 

Conclusion

Market capitalisation offers a simple yet effective way to understand a company's size and its standing in the stock market. While it should not be the only factor behind an investment decision, it provides valuable insight into a company's scale, risk profile, and market perception.