Let's Decode Some Stock Talk

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This is a jargon-free zone.

The language of money is exactly that: a language. But unlike Italian or Chinese, there's no Rosetta Stone for financial jargon. Lucky for you, there is the Money Minute! Here, I'll be breaking down the terminology you've been seeing (and, let's face it, skimming) in the headlines. Today, we're focusing on market cap.

WTF is market cap?

Market cap is a cute little nickname for “market capitalization.” It’s a measurement to help us understand to what extent a company is a big deal. First, I’m going to tell you how market cap is calculated. Then, we’re going to get into what it actually means, and how you should consider market cap when investing. All you need to know right this very second is the big picture: market cap is a number that represents the value of a company, specifically from an investing perspective.

Before we can calculate market cap, we need to unpack one last jargon-y term: shares outstanding. Here’s the Nictionary definition: shares outstanding is essentially the number of shares issued by a company. You can see why you would want to know the details on the company’s shares outstanding because that can really affect your payout as an investor. If you invest in a company and you know that this company has one million dollars to split between all of their shares outstanding, it makes a big difference whether you’re splitting a one million dollar pot equally between two people, or one million people. Shares outstanding will tell you if you’re a big sunfish in a kiddie pool, or a teeny guppie in the Atlantic Ocean.

And we use the number of shares outstanding to calculate market cap. So let's do it! To find the market cap, you take the number of shares outstanding and multiply that by the share price. So, let’s say I own a company and I have a share price of $20 and one million shares outstanding. To get my company’s market cap, I would multiply the $20 share price by the 1,000,000 shares outstanding and, tada! We get the market cap: $20 million.

$20 (price/share) * 1,000,000 (shares outstanding) = 20,000,000.

In the world of Wall Street, market cap is most often used as a metric to classify companies. In the last example, I had calculated a market cap of 20 million for my company. But in the stock market, that’s not a lot of moolah. A company with a market cap of under 300 million dollars is called a micro cap company. Can you imagine calling anyone with 300 million micro? Ouch.

A small cap company is a company with a market cap between $300 million and $2 billion, companies with market cap between 2 billion and 10 billion are considered mid cap and large cap status is reserved for companies with market caps between 10 billion to $200 billion. If you can believe it, there’s also a mega cap which is just... everything more than $200 billion. That’s for the giant companies like Apple, which, by the way, currently has a market cap of over $ 2 trillion.

What's the big picture?

Conventional wisdom is that investment risk decreases as the “cap” gets larger. In other words, a large cap company like Apple is too big to fail. On the flip side, it’s generally suggested that smaller cap companies are riskier, but have the most room for growth.

Sometimes these things are true, but not always. To those who say large cap companies are too big to fail, I’d point to Enron. When Enron went under, its market cap was 65 billion. Enron is a perfect example of the issue with market cap: it doesn’t tell the whole story about a company. That’s my issue with people making big investment decisions based on the handful of statistics that show up on the investing apps or Yahoo Finance.

When you pick stocks to invest in, you want to be making informed investment decisions based on what the company is going to do in the future. You can’t make that informed decision if you’re only looking at a snapshot of a company at one moment: you need to look at its history. So use the time that you would have spent calculating market cap to look at other indicators that the value of the company is growing: like a consistent rise in share price year over year, or an announcement that the company is putting more money into research and development for new cutting-edge products and services.

xo,

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