In finance, the term market capitalisation is used to reference the aggregate value of a specific security, sector, exchange, or trading venue. Frequently shortened to "market cap," it may be calculated in a variety of ways and is especially useful when comparing the relative size of tradable securities or marketplaces.
One of the most common applications of market capitalisation is to corporate stock offerings. According to the U.S. Securities and Exchange Commission (SEC), a company's market cap is calculated by multiplying the current price of a single share by the total number of outstanding shares.
For example, the market cap for Amazon.com (AMZN) is derived via the following computation (values are approximate):
- Share Price: US$1850 per share
- Outstanding Shares: 492 million
- Market Cap: (1850 * 492,000,000) = US$910.2 billion
Market cap is a key statistic used by investors to measure a publicly traded corporation's market value. However, due to stock prices being dependent largely upon perception, it may vary from the actual value of a company. Regardless of this discrepancy, the calculation may be used to place a corporate listing into one of four size-oriented categories:
- Large: US$10 billion or more
- Mid: Between US$2 and $10 billion
- Small: Between US$250 and $2 billion
- Micro: Less than $250 million
As of year end 2018, the following were the top ten global companies in terms of market cap:
- Apple: US$926.9 billion
- Amazon.com: US$777.8 billion
- Alphabet: US$766.4 billion
- Microsoft: US$750.6 billion
- Facebook: US$541.5 billion
- Alibaba: US$499.4 billion
- Berkshire Hathaway: US$491.9 billion
- Tencent Holdings: US$491.3 billion
- JPMorgan Chase: US$387.7 billion
- ExxonMobil: US$344.1 billion
As a general rule, the larger the market cap, the greater the stability of a company. In turn, large cap stocks typically exhibit less volatility than small cap issues. As a result, they are used to comprise leading indices such as the Dow Jones Industrial Average (DJIA), S&P 500, and the FTSE 100. Index products such as the Russell 2000 or S&P 400 focus on small and mid-cap stocks in an attempt to deliver growth-based returns to investors.
In addition to individual corporate offerings, market cap is frequently used to describe the asset distributions of mutual funds and ETFs. If a fund holds small, medium, or large cap stocks, the allocation is disclosed to the public via median or average market cap value.
Similar to corporate stock offerings, cryptocurrencies are often scrutinised in terms of market cap. Calculating the market caps of cryptocurrencies is done in much the same way as it is for stocks. For instance, the capitalisation for Bitcoin (BTC) is derived in the following fashion (values are approximate):
- Coin Price: US$5265 per BTC
- Circulating Supply: 17.65 million
- Market Cap: (5265 * 17,650,000) = US$92.9 billion
As of April 2019, the following are the top ten cryptocurrencies in terms of capitalisation:
- Bitcoin (BTC): US$92.9 billion
- Ethereum (ETH): US$18.2 billion
- Ripple (XRP): US$14.2 billion
- Bitcoin Cash (BCH) : US$5.4 billion
- EOS (EOS): US$4.9 billion
- Litecoin (LTE): US$4.9 billion
- Binance Coin (BNB): US$2.9 billion
- Tether (USDT): US$2.5 billion
- Stellar (XLM): US$2.2 billion
- Cardano (ADA): US$2.1 billion
Due to the inherent volatility of coin pricing, cryptocurrency market caps often fluctuate significantly. Subsequently, rankings based on capitalisation are subject to change frequently.
Exchanges And Markets
In addition to securities, the concept of market cap is frequently applied to trading venues. This is accomplished by totaling the aggregate value of the securities traded on a given exchange or market. From this perspective, an exchange or market's capitalisation refers to its size in terms of currency value instead of participation metrics such as traded volumes or open interest.
As of November 2018, the following are the world's largest stock exchanges in terms of capitalisation:
- New York Stock Exchange (NYSE): US$22.9 trillion
- NASDAQ: US$10.8 trillion
- Tokyo Stock Exchange (TSE): US$5.67 trillion
- Shanghai Stock Exchange (SSE): US$4.02 trillion
- Hong Kong Stock Exchange (SEHK): US$3.93 trillion
- Euronext: US$3.92 trillion
- London Stock Exchange (LSE): US$3.76 trillion
- Shenzhen Stock Exchange (SZSE): US$2.50 trillion
- Toronto Stock Exchange (TSX): US$2.10 trillion
- Bombay Stock Exchange (BSE): US$2.05 trillion
The capitalisation of a market or exchange is an important metric to both traders and investors. Essentially, markets with larger caps feature a greater range of offerings, traded volumes, and liquidity. These characteristics are attractive to aspiring participants as they promote trade-related efficiency.
Market capitalisation is a staple of traditional finance. Its straightforward calculation gives traders and investors a simple way of comparing securities or markets in terms of size. From blue-chip corporate stocks to brand-new cryptocurrency products, market cap is one fundamental way that value is quantified and put into context.
Senior Market Specialist
Russell Shor (MSTA, CFTe, MFTA) is a Senior Market Specialist at FXCM. He joined the firm in October 2017 and has an Honours Degree in Economics from the University of South Africa and holds the coveted Certified Financial Technician and Master of Financial Technical Analysis qualifications from the International Federation…