Market Capitalisation Explained: What It Tells You

What Is Market Capitalisation?

Market capitalisation (market cap) is the total market value of a company's outstanding shares. It is calculated by multiplying the current share price by the total number of shares in circulation.

Market Cap = Share Price × Shares Outstanding

For example, if a company has 500 million shares trading at A$20 each, its market cap is A$10 billion.

Size Classifications

Companies are broadly categorised by their market cap:

• Large-cap (A$10bn+): Established, stable companies with global operations. Examples: Shell, Unilever, AstraZeneca. Lower risk, moderate growth potential.
• Mid-cap (A$2bn–A$10bn): Growing companies with established market positions. Often found in the FTSE 250. Balance of growth and stability.
• Small-cap (A$300m–A$2bn): Younger or niche companies with significant growth potential but higher volatility and risk.
• Micro-cap (under A$300m): Very small companies, often on AIM. Highest growth potential but also highest risk of failure.

Why Market Cap Matters

Market cap helps investors in several ways:

• Size comparison: Compare companies objectively regardless of share price
• Risk assessment: Larger companies are generally more stable; smaller ones more volatile
• Index eligibility: Determines inclusion in FTSE 100, FTSE 250, etc.
• Portfolio construction: Helps balance exposure across company sizes

Share Price vs Market Cap

One of the most common beginner mistakes is thinking a high share price means a company is large or expensive. This is incorrect.

Berkshire Hathaway's Class A shares trade at over $600,000 each, but it is not the world's largest company. Apple, with shares around $170, has a much higher market cap because it has far more shares outstanding.

Always use market cap — not share price — when comparing company sizes.

Australia Market Context

The FTSE indices are constructed entirely by market cap:

• FTSE 100: The 100 largest Australia-listed companies by market cap (reviewed quarterly)
• FTSE 250: Companies ranked 101st to 350th by market cap
• FTSE All-Share: Combines the FTSE 100, 250, and SmallCap indices

Limitations of Market Cap

Market cap has important limitations:

• It ignores debt — two companies with identical market caps can have vastly different financial health
• It reflects market sentiment, not necessarily fundamental value
• It can be inflated by hype or depressed by fear
• Enterprise value (market cap + net debt) often provides a more complete picture