The Importance of Market Cap

Market capitalization is the market value of a company. In other words, how big is the check you need to write in order to buy all the common stock? To calculate a company's market cap, multiply the number of shares of stock (published in the most recent company financial data) by the current market value of each share.

For example, a company with 10 million shares outstanding selling for $2.50 per share has a market cap of $25 million. If the shares were selling for $75.00 per share, the market cap would be $750 million.

Market cap classification (grouping companies by market cap) is a way to segment the market for analysis. The idea is that companies with similar market caps are similar in other respects as well. There is lots of research on investment performance to confirm this segmentation is valid.

The research shows variations in performance, volatility, and tradability between stocks from different market cap classifications. So market cap classification is worth understanding.

How small is small, how big is big?

While there is general agreement on the category names (nano cap, micro cap, small cap, mid cap, and large cap), the actual market cap range used to define the categories is not consistent. It varies from analyst to analyst and it varies over time.

Not much we can do to address the analyst to analyst problem, but we can address the variation over time problem.

Rather than using the same fixed market cap regardless of the point in time we are studying, we will always assign market cap percentiles as the category ranges. This allows us to be consistent within the context of the market at any point in time. This is how researchers have addressed the problem.

Later, when screens are developed that consider market cap, we will use the percentile ranking if available in the data.

Site definition of market cap classifications

Throughout this site, we will use the following percentiles to classify stocks by market cap:

• Nano Cap: The bottom 35% of the market cap range. As of May 2008 (according to the AAII Stock Investor Pro database), the largest market cap in this category was about US $35M.
• Micro Cap: The 30% of the market cap range from the 36^th to the 65^th percentile. As of May 2008, the actual micro cap range was about US $35M to US $384M.
• Small Cap: The 20% of the market cap range from the 66^th to the 85^th percentile. As of May 2008, the actual small cap range was about US $384M to US $2.7B.
• Mid Cap: The 10% of the market cap range from the 86^th to the 95^th percentile. As of May 2008, the actual mid cap range was about US $2.7B to US $15.6B.
• Large Cap: The top 5% of the market cap range. As of May 2008, the actual market cap for this class exceeded US $15.6B.

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