Market capitalisation

Market capitalisation is the share price multiplied by shares outstanding: the cost of buying every share at the current price. A company with 500 million shares at $40 is worth $20 billion. It is the standard measure of company size and the basis of most index weightings.

It is not the cost of acquiring the company, since a buyer also settles the debt and receives the cash. That figure is enterprise value, market cap plus net debt, and for a heavily indebted company the two can differ by more than the market cap itself.

Nor does it measure how much money has gone into a company. A market cap of $20bn does not mean $20bn was invested; it means the last shares to change hands did so at a price that, applied to every share, comes to that figure.

The size bands are conventions rather than definitions, and they drift upwards as markets grow. The common US usage is set out below.

The bands matter mainly because index membership and fund mandates follow them. A fund with a small-cap mandate cannot hold a company that has grown out of the band, and a company crossing into a larger one becomes eligible for a different set of buyers. That is a change in who owns the shares rather than in the business.

A company with more than one class of share, such as Berkshire Hathaway, Alphabet and many family-controlled businesses, has a price for each class and a share count that may be reported in units of only one of them. Combining the wrong pair produces an answer wrong by the conversion ratio between the classes, which for Berkshire is a factor of fifteen hundred.

US-listed foreign companies carry the same trap. An American depositary share represents a fixed number of ordinary shares, commonly five, four or eight to one. The company reports its share count in ordinary shares while the quoted price is per depositary share, so multiplying the two overstates the result by the depositary ratio.

Neither error produces an obviously wrong figure. Both return a plausible number in the right units, which is why a market cap is worth checking against something independent: reported equity, revenue, or simply whether the ranking it produces makes sense against companies of known size.

Shares outstanding counts every share in existence. Free float excludes shares not available to trade, such as founder and family stakes, government holdings and cross-shareholdings.

Index providers generally weight by float rather than by total shares, so a company whose founders hold half the stock carries roughly half the index weight its headline size implies. Where an index weight and a market cap disagree, this is usually why.

Fully diluted counts add the shares that would exist if options and convertible instruments were exercised. At companies paying heavily in equity the diluted count is materially higher, and it is the more conservative denominator for any per-share figure.

Enterprise value adds net debt to market capitalisation: borrowings less cash. A company with a $20bn market cap, $6bn of debt and $1bn of cash has an enterprise value of $25bn.

The distinction decides which multiples are comparable. A P/E and a price-to-book are equity measures and are affected by how a company is financed. EV/EBITDA and EV/sales are whole-business measures and are not. Comparing a heavily indebted company against a debt-free one on an equity multiple compares their balance sheets as much as their operations.

On the S&P 500 heatmap, tile area is the square root of market cap rather than market cap itself. The range within the index is wide enough that at true proportion a handful of megacaps would fill the screen and several hundred companies would be invisible.

The square root compresses the range while preserving the ordering, and a floor keeps every tile above about 3% of the largest so the smallest remain visible and clickable. Judging a sector's share of the index by eye will therefore understate the largest companies and overstate the tail.

Treating market cap as what a company is worth to a buyer. Acquisitions are priced on enterprise value, and they are usually agreed above the market price.

Comparing an equity multiple across companies with very different debt loads.

Multiplying a price by a share count from a different class or a different depositary basis.

Assuming index weight follows headline size, when providers weight by free float.

Reading a market cap that is far out of line with the company's revenue or equity as a bargain rather than as a data error. It is almost always the second.