What’s Market Cap?

Dear Dr. Per Cap:

I just read that Apple has a $3 trillion dollar market cap. What does that mean?

Signed,

Jenny L.


Dear Jenny L.,

Market capitalization, or market cap, is an investing term used to describe the size of a publicly traded company. It’s based on a simple formula that multiplies the number of shares of stock in a company by its share price.

Here’s a basic example: Say you have a company with 1,000 shares of stock and each share trades for $10. Then the company’s market cap is $10,000.

Apple’s $3 trillion market cap is absolutely astounding. The company has more than 16 billion outstanding shares of stock that during the last calendar year traded as high as $181 and as low as $116.

One thing to remember is that a company’s market cap is always changing, along with its share price. In fact, Apple only temporarily reached its $3 trillion market cap on Jan. 3, 2022, when its share price briefly hit $182.86. Then the share price dropped 85 cents, causing the company’s market cap to close the trading day a few billion shy of $3 trillion. Yep, 85 cents add up quickly when multiplied by a number with nine zeros.

Nevertheless, Apple is the first U.S. company to reach a $3 trillion valuation. That’s nearly as much as the gross domestic product of neighboring countries Canada and Mexico combined. Not bad for a business started in a garage in 1976.

When considering which stocks to buy, investors pay close attention to a company’s market cap because it provides two very important pieces of information – a company’s size and its value. Kind of like house shopping when a homebuyer’s first questions are likely, “How big is the house?” and “What’s the asking price?”

Companies can also be grouped into categories based on market cap size as shown below.

Market Capitalization Company Valuation
Mega Cap More than $200 billion
Large Cap $10 billion to $200 billion
Mid Cap $2 billion to $10 billion
Small Cap $300 million to $2 billion

 

When designing a portfolio, an investor might even choose stocks with different market caps to manage risk. For example, some investors prefer mega cap companies like Apple, Walmart, and Amazon for stability and lower risk. While others like riskier small-cap stocks like Rite Aid, Del Taco, and 1-800 Flowers that offer greater growth potential.

Different strokes for different folks!


Ask Dr. Per Cap is a program funded by First Nations Development Institute with assistance from the FINRA Investor Education Foundation. For more information, visit www.firstnations.org. To send a question to Dr. Per Cap, email askdrpercap@firstnations.org.