What is market capitalisation?Easy

Share price times share count. Not what the company is worth, not what it would cost to buy, and not the amount of money anybody has put in.

3 min read · 538 words

The short answer: market capitalisation is the share price multiplied by the number of shares. It is the market's price for the whole equity of a company at this moment. It is quoted constantly and misread in three specific ways.

What it is not

• Not the money invested in the company. Shares mostly change hands between investors; the company received cash only when it issued them, at whatever the price was then. A company whose market cap rose by a billion did not receive a billion.
• Not what it would cost to buy the company. A buyer takes on the debt too and gets the cash — which is why acquirers talk about enterprise value, and why a takeover price is normally well above the market cap in any case.
• Not a measure of size in any operational sense. A company with few employees and no factories can be worth more than one with tens of thousands of both.

The number acquirers actually use

Enterprise value is market cap plus net debt, plus a few other items, and it is what you are really buying: the business itself, independent of how it happens to be financed. A company with a lot of debt has a small market cap and a large enterprise value, and comparing two companies on market cap alone silently compares their financing rather than their businesses.

Valuation works through the bridge between the two, and the valuation desk is where the arguing about it happens professionally. On this site the EV/EBITDA calculator is where you can see the effect for yourself.

Free float: how much is actually available

Not every share trades. A founder's stake, a state holding, a cross-shareholding — these exist and are counted in market cap but are not for sale. The part that is available is the free float, and it matters more than the headline for two practical reasons: index inclusion is usually weighted by free float rather than by total shares, and a company with a small float moves further on the same amount of buying.

Why index funds care, and why that moves prices

Most indices weight their members by market capitalisation, so a fund tracking one holds more of what is already larger. That has a consequence worth understanding: money flowing into index funds buys existing weights rather than expressing a view, and a company entering or leaving an index produces buying and selling by holders who have no opinion at all. What an index really is is the page on the rulebook underneath.

The bands, and what they actually signal

Large, mid and small capitalisation are conventional bands rather than defined categories, and the boundaries differ by index and by country. What the band correlates with is not quality but liquidity: how much you can buy or sell without moving the price against yourself. What liquidity costs puts a number on that, and it is a real cost that never appears on a statement.

The one sentence to take away

Market capitalisation is a price, not a valuation and not an amount of money anybody handed over — and the moment debt enters the question, enterprise value is the number that answers it.