The Difference Between Market Capitalization and Shares Outstanding

When identifying potential trading opportunities, assessment of the company in question can be just as valuable as technical analysis. One of the most important metrics those in the investing industry pay attention to is the estimated size of a company.

There are a number of ways to asses a company's size and total value, but the simplest and most common is market capitalization. Market capitalization is simply the total number of shares outstanding multiplied by the current price for a single share. A company with 2.5 million shares outstanding and a stock price of $50 per share would have a market cap of $125 million.

Market cap values are divided into categories to help simplify company valuation. Companies with a market cap of less than $2 billion are considered small-cap. Companies with a market cap of $2 billion to $10 billion are medium-cap, and anything larger than $10 billion is considered large-cap. Large-cap companies are the big ones, such as General Electric, Apple or Starbucks. The stocks of these companies are also called blue chip stocks.

While it may seem that a larger, more established company presents a better investment opportunity, many in the finance industry warn against underrating small-cap stocks. Though newer, smaller companies are more likely to go under than their giant counterparts, they also have exponentially more room to grow. Getting in on the ground floor with a successful small-cap stock can be highly lucrative.

Those in areas such as accounting and economics may use different measures of company size and value that take additional factors into account.