Blog / What is market capitalisation? A worked example and three common misreadings
What is market capitalisation? A worked example and three common misreadings
Market capitalisation is the value the stock market puts on all of a company's shares: the share price multiplied by the number of shares in issue. It describes size at a moment in time. It is not the company's profit, its accounts value or a forecast.
Short answer: multiply the share price by the number of shares in issue. The result changes every time the share price moves, so any market cap figure is only true at the moment it was worked out.
The short answer, with a worked example
The US Securities and Exchange Commission's investor site defines market capitalisation as the current market price of one share multiplied by the total number of shares outstanding. UK usage is the same.
To make that concrete, take a made-up company called Brightwell Components plc. The company and every number below are invented.
- Shares in issue: 100 million
- Share price: £5 (shown as 500p, since UK share prices are often quoted in pence)
- Market capitalisation: 100 million × £5 = £500 million
That £500 million is the market's current price for all of Brightwell's shares added together. Nobody has paid £500 million for the company. It is a calculation based on the most recent trades.
One practical trap: mix up pence and pounds and your answer comes out 100 times too big.
Why market cap changes when the company has not done anything
Say Brightwell's share price goes from £5 to £6 over a few days. The factory, staff, customers and accounts are all the same. The business has not changed.
The market cap has: 100 million shares at £6 gives £600 million. At £4 it would be £400 million. The figure follows what buyers and sellers are willing to pay, so it can move on news, interest rates or a wider sell-off even when nothing inside the company has changed.
The share count changes too, but only through specific events such as issuing new shares or buying shares back. From one day to the next, the change in market cap comes from the share price.
Three mistakes when reading a market cap figure
1. Treating it as profit or revenue. A £500 million market cap does not mean the company earns £500 million, or makes a profit at all. A loss-making company can have a large market cap, and a profitable one can have a small one.
2. Confusing it with book value or enterprise value. Book value comes from the company's own balance sheet. Enterprise value also takes debt and cash into account. Market cap only looks at the price of the shares.
3. Assuming an index counts the full market cap. FTSE Russell adjusts for the shares that are actually available to investors, so the figure an index uses can be well below the headline number. More on this below.
Market cap versus other 'sizes': revenue, profit, book value and enterprise value
A company can be big in several different ways, and the measures do not line up neatly:
- Market cap: what the market currently values all the shares at.
- Revenue: money coming in from sales over a period.
- Profit: what is left of revenue after costs.
- Book value: assets minus liabilities, as recorded in the company's accounts.
- Enterprise value: a measure of the whole business that adds debt to market cap and takes off cash.
Each measure answers a different question. Brightwell could have a £500 million market cap with sales of a very different size, and both figures would be correct. When comparing companies, compare like with like.
Why indexes use free-float market cap, not the headline figure
FTSE Russell's ground rules for the FTSE UK Index Series say constituents are adjusted for free float. Free float means the shares that ordinary investors can buy and sell. Shares that are restricted, such as a large stake kept by a founder, are left out. Under the same rules a security needs a free float of at least 10% to be eligible, with a narrow exception for some new issues.
The rules use market cap in two different ways, which is easy to miss:
- Deciding membership. The FTSE 100 is made up of the largest qualifying UK companies ranked by full market capitalisation, before any free-float adjustment. Our guide to what the FTSE 100 index is explains how the index works.
- Setting weight. Once a company is in the index, its weight comes from the free-float-adjusted figure.
Back to Brightwell. Suppose a founder holds 40% of the shares and plans to keep them. In this simplified example the free float is 60%, so an index adjusting for free float would count about £300 million of Brightwell's £500 million. (FTSE Russell's real definition of restricted holdings is more detailed and is set out in its ground rules.) The result is that two companies with the same headline market cap can carry quite different weights in the same index.
Where to find the share count from the company itself
You do not need a third-party website for the share count. Companies give the number of shares in issue in their annual reports and in announcements on their investor relations pages.
UK-listed companies also publish a regular "Total Voting Rights" announcement. Under the FCA's Disclosure Guidance and Transparency Rules (DTR 5.6), a company must tell the public the total number of voting rights and capital for each class of share at the end of any calendar month in which that number has changed. It must also give the number of voting rights attached to shares it holds in treasury (its own shares that it has bought back and kept). Treasury shares have no votes, so check which figure you are using.
Multiply that share count by the price and you have worked out the headline market cap yourself.
What a market cap figure in a news headline does and does not tell you
A market cap in a headline tells you roughly how big the market currently thinks a company is. It does not tell you whether the company is well run, whether its shares are cheap or expensive, or where the price will go next. A rising figure does not mean it will keep rising, and a falling one does not mean it will recover.
The same caution applies to the news itself. MarketFrame scores the tone of each day's coverage of every FTSE 100 company, from −10 (clearly bad news for the company) to +10 (clearly good), on the daily FTSE news hub and in the daily overviews. Tone describes the coverage. It is not a share-price forecast, and neither is market cap. To see how coverage of one company or sector has changed over time, start from the company and sector list.
Read a market cap figure as what it is: a measure of size at one moment.
Questions people ask
What is the meaning of market capitalisation?
It is the value the stock market puts on all of a company's shares, worked out as the share price multiplied by the number of shares in issue. It is a snapshot of size at one moment.
Is there a good market cap?
No. There is no good or bad figure. A bigger number is not better and a smaller one is not worse; it simply describes size. It tells you nothing about how well a company is run or what its shares will do.
Is market cap the same as a company's value or its profit?
No. It is the market's current price on the shares. It is not profit, not revenue and not the net assets shown in the company's accounts (book value). Enterprise value is another separate measure that also takes account of debt and cash.
Why does market cap change every day?
Because the share price changes whenever shares trade. The business can stay exactly the same while buyers and sellers push the price up or down, and the market cap follows. The share count changes far less often, through events such as new share issues or buybacks.
What is the difference between market cap and free-float market cap?
Market cap counts all shares in issue. Free-float market cap counts only the shares available to ordinary investors, leaving out holdings such as a large stake kept by a founder or a government. FTSE Russell adjusts the constituents of its UK indexes for free float, so a company with a small free float carries less weight than its full market cap suggests.