A quick guide to market caps

Market capitalization, commonly called market cap, is the total market value of a publicly traded company’s common stock. It’s a metric that indicates a company’s size in the market, which can impact its risk and return potential. Knowing a company’s market cap can help investors identify companies with established market influence and make more informed decisions.

How do you calculate market cap?

To calculate market cap, multiply the current stock price by the number of shares it has outstanding:

E*TRADE customers can see a ticker’s current market cap on the Snapshot view of the Quotes page.

For example:

• A company that has a stock price of $35 with 10 million shares outstanding has a market cap of $350 million.
• If that company’s stock price rises to $40, then its market cap would rise to $400 million.
• If its stock price falls to $30, its market cap would then be $300 million.

Market caps at a glance

Investors can segment companies by market cap when screening for new opportunities. Although market cap is an indication of a company’s size, not its business model or sector, there can be similarities including growth potential, risk, and geographic exposure.

Small-cap companies generally have a market capitalization of $250 million to $2 billion. They tend to be domestic companies focused on niche markets or new, rapid-growth industries.

• Diversification: Small caps can offer portfolio diversification, since they don’t always move in lockstep with the broad market, but can also be more volatile and susceptible to market fluctuations.
• Growth potential: Small-cap companies are often young, fast-growing companies looking to grow their business, appealing to investors seeking long-term growth potential.  
• Risk: Small-cap stocks carry more risk than mid- and large-cap stocks. Since they have higher sensitivity to the economy, they can outperform in early-cycle environments. However, they also lack the scale and access to capital markets that larger-cap companies have, which can lead to volatility or bankruptcy in a downturn.

Micro-cap companies are a subsegment of small caps which tend to range between $50 million and $300 million in market capitalization. Their features are similar to small caps, but micro-cap stocks can be even more volatile. Investors who are willing to take on more risk for potential future returns may choose to incorporate small or micro caps into their portfolio.

Mid-cap companies typically have a market capitalization between $2 billion and $40 billion.

• Diversification: Mid-cap stocks can provide a mix of stability and growth potential.
• Growth potential: Mid-caps tend to be bigger and more established firms than small caps, but still have significant room for growth and expansion.
• Risks: Mid-caps may offer higher returns than large caps and are generally viewed as less risky than small caps. However, they still come with volatility and liquidity risks, so investors should make sure to do their homework. 

Large-cap companies usually have a market capitalization between $10 billion and $200 billion. These companies are commonly well-known, mature firms that operate in many countries and serve a variety of markets.

• Diversification: Large caps serve across multiple industries and international locations, reducing exposure to risk in any concentrated sector. Diversified revenue can help mitigate market downturns and balance investments in times of volatility.
• Growth potential: Large caps tend to have limited growth potential than smaller companies. However, investors may incorporate large caps in their portfolio because they offer stability in their consistent performance or steady dividend payments.
• Risk: When compared to other equities, large-cap stocks are typically seen as more conservative investments—offering less growth potential than other market caps, but also the least amount of risk. However, large-cap stocks can still be riskier than other asset classes like fixed income.

Mega cap companies are another segment of large caps. They generally have similar characteristics but represent behemoth companies with market caps of $200 billion or more.

With the emergence of cryptocurrencies like Bitcoin and Ethereum, market cap and trading volume have become a key indicator to assess their values. The market cap of a cryptocurrency is defined by the total market value of a cryptocurrency’s coins that have been mined. Larger market cap cryptocurrencies often have higher trading volume and liquidity.  

While cryptocurrencies can experience significant volatility and the concept of market cap does not apply in the same way as it does for stocks, market cap for a cryptocurrency may be used to indicate the potential stability, popularity, or history of an asset.

• Large-cap cryptocurrencies may have a better reputation than smaller cap currencies because of their liquidity and history of established growth.
• Mid-cap cryptocurrencies may have high growth potential but with higher risks.
• Small-cap cryptocurrencies might have large growth potential but might be unstable or volatile and could be disrupted by cryptocurrencies with better product market fit or selling from early investors.

Market cap can be a valuable metric for investors looking to create a well-diversified portfolio, allocating investments across a variety of sectors, industries and digital currencies. The right mix will be up to the investor, depending on their individual financial goals, investment timeline, and risk tolerance.

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