Capitalisation

What is capitalisation?

A simple shorthand formula that enables investors to work out the current market value of a company. It’s calculated by multiplying the number of shares by their current price.

Depending on their size, companies are generally classed as large-cap (typically $10billion+), mid-cap or small-cap (typically $2billion).

Where have you heard about capitalisation?

The term often hits the headlines when a company’s share price rises or falls dramatically.

Investors use market cap to assess a company’s potential for growth and the investment risk that goes with it. So you’ll hear investors talking about it too.

What you need to know about capitalisation...

Small-cap companies may offer higher growth potential but with a higher risk, while large-cap companies typically spell lower growth but lower risk too.

As an example of how the formula works, if a company had five million shares trading at $10, its market capitalisation would be $50 million.

One criticism of the capitalisation formula, however, is that by excluding key factors for valuing stock such as cash levels, assets and debt, you don’t get a complete picture of a company’s economic value.