What is Market Capitalisation?

Market capitalisation, or “market cap,” is the total market value of a company, calculated by multiplying the current market price (CMP) of its shares by the total number of outstanding shares. It’s a key metric used to gauge a company’s size and value.

Investors and analysts use market cap to categorise companies by size.

Key points:

• Market capitalisation reflects the total value of a company’s outstanding shares at the current price.
• It helps evaluate a company’s size and market value.
• Companies are classified as large-, mid-, or small-cap based on their market cap.
• Blue-chip stocks are usually large- or mega-cap, while the smallest are called micro-caps.

Understanding Market Capitalisation

Tallying market capitalisation involves multiplying a company’s current share price at close of trading by the total number of outstanding shares. The formula is straightforward:

Market Capitalisation (Market Cap) =Price Per Share x Shares Outstanding

For example, if a company – let’s call it Southern Cross Aerospace Pty Ltd, has five million shares outstanding, each priced at $4.50, its market cap would be:

5,000,000 x $4.50 = $22.5 million

However it is important to factor in which types of securities are not included in the market cap tallying. The ASX, in particular states that equity securities convertible to regular securities, like preference shares, exchange shares, debt securities, and rights and entitlements, is not applicable.  

Why Market Capitalisation Matters

Market capitalisation is an important metric for several reasons, such as the following.

Company Size and Stability

Market cap gives an indication of a company’s size and financial stability. Larger market caps often signal established and stable companies, while smaller market caps might indicate newer or less stable businesses.

Investment Decisions

Investors use market cap to determine the risk and potential return of investing in a company. Large-cap companies are generally considered safer but may offer lower growth potential compared to small-cap companies, which might present higher risk but also greater growth opportunities.

Comparative Analysis

Market cap allows investors to compare companies within the same industry or across different sectors. It helps in understanding a company’s position relative to its peers.

Index Inclusion

Many stock market indices are weighted by market capitalisation, meaning that larger companies have a greater impact on the index’s performance. For example, the Australian Securities Exchange’s ASX 200 index comprises its 200 largest companies listed, based on market cap.

Types of Market Capitalisation

Companies are often categorised into different market cap sizes, each with its own characteristics:

Large Cap

The term “large cap” applies to companies with a market cap of over $10 billion. These are typically well-established companies with stable earnings and a significant market presence, therefore labelled safe investments.

Mid Cap

Companies with market caps ranging $2 billion and $10 billion are “mid cap.” These companies are usually in a growth phase and can offer a balance between stability and growth potential.

Small Cap

Small-cap companies are those with a market cap of under $2 billion. They are often younger and can provide high growth potential, but with higher risk. In the ASX you can find them in the S&P/ASX Small Ordinaries index AKA XKO, which is the bottom tier of the ASX 300.

Australian Companies by Market Cap Size

To illustrate these categories, here are examples of Australian companies within each market cap size, as noted in the ASX’s top 50 to 100 listings. 

Large Cap Companies

BHP Group Limited (ASX: BHP)

As one of the world’s largest mining companies, BHP boasts a market cap well over $200 billion, with $207.22 billion as of this writing. Its significant market presence and extensive operations make it a quintessential large-cap stock.

Commonwealth Bank of Australia (ASX: CBA)

CommBank is BHP’s biggest rival in the ASX, with market caps exceeding $216.81 billion. Its stability and strong financial performance classify it as a large-cap company.

CSL Limited (ASX: CSL)

CSL is a global biotechnology company with a market cap around $149 billion. It is a leading player in its field, making it a major large-cap entity on the ASX.

Mid Cap Companies

Dominos Pizza Enterprises Limited (ASX: DMP)

With a market cap around $2.9 billion, Dominos is a prominent player in the fast-food industry, categorising it as a mid-cap company.

Fisher & Paykel Healthcare Corporation Limited (ASX: FPH)

This company, known for its innovative healthcare products, has a market cap of approximately $8 billion, placing it in the mid-cap range.

Telstra Corporation Limited (ASX: TLS)

Telstra, one of Australia’s largest telecommunications companies, has a market cap around $7 billion, making it a mid-cap company.

Small Cap Companies

Bega Cheese Ltd (ASX: BGA)

Currently standing at No 269 in the ASX 300 with market caps of $1.33 billion, Bega is well known for its range of packaged food items, such as the iconic Vegemite spread.

Austal Limited (ASX: ASB)

Specialising in shipbuilding, Austal has operations in the USA and Australia, with its market cap standing at $866m.

Dicker Data Ltd (ASX: DDR)

One of the higher-priced companies in the ASX 300 small-caps field with a market cap of $1.85 billion, Dicker Data is known for its various tech solutions.

The Role of Market Capitalisation in Investment Strategy

Understanding market capitalisation can significantly influence investment strategy:

• Diversification: Investors often diversify their portfolios by including a mix of large-cap, mid-cap, and small-cap stocks, which may help them gauge earnings or losses in specific areas.

• Risk Management: Large-cap stocks generally offer lower risk and steady returns, while small-cap stocks, though riskier, can provide higher growth opportunities.

• Growth vs Value: Large-cap companies are often seen as value investments due to their stability, while mid-cap and small-cap stocks are typically growth investments, offering the potential for higher returns.

Conclusion

Market capitalisation is a vital metric for understanding and evaluating companies within the stock market. By categorising companies into large-cap, mid-cap, and small-cap, investors can make informed decisions based on their risk tolerance and investment goals. In Australia, the ASX features a diverse range of companies across these market cap sizes, each offering unique opportunities and challenges. Whether you’re an experienced investor or just starting, grasping the concept of market capitalisation can enhance your ability to navigate the stock market and make strategic investment choices.

DISCLAIMER: This article is for informational purposes only and does not supersede official business or investment advice. The data listed in the article is based on the most accurate stock data at time of writing and may change without notice. BARTERCARD does not have business relationships with any stock exchange or companies mentioned.