Market Capitalization vs. Shares Outstanding: An Overview
When identifying potential companies for trading opportunities, there are many areas of study, including technical analysis and fundamental 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 variety of ways to look at the size of a company, two of the most common being the number of shares outstanding, and market capitalization, which is the number of shares outstanding multiplied by the current share price of a single share. Shares outstanding is a component of market capitalization and simply the number of shares of a public company that are currently held by shareholders.
A company with three million shares outstanding and a stock price of $50 per share would have a market capitalization of $150 million.
Both market capitalization and shares outstanding refer to public companies, as they have publicly listed shares, whereas private companies do not.
- Two ways to measure the size of a company include market capitalization and shares outstanding.
- Shares outstanding refer to the number of shares of a company held by all of its shareholders.
- Shares outstanding is a component of market capitalization, which is the total number of shares outstanding multiplied by the current share price of a single share.
- Market capitalization values are categorized as small-cap, mid-cap, and large-cap.
Market capitalization, also known as market cap, is a monetary value that changes every day as the share price of a company changes every day. Because companies vary in size, 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 mid-cap, and anything larger than $10 billion is considered large-cap. Large-cap companies are the big ones, such as General Electric (GE), Apple (AAPL), or Starbucks (SBUX). The stocks of these companies are sometimes 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.
Conversely, the larger a company is, does not necessarily mean it is a better investment. Large companies may be saddled with debt, have limited growth prospects, and a multitude of other problems that come with operating on a larger scale.
Shares outstanding refer to the number of shares of a company that are currently being held by its shareholders. When a private company needs to raise capital, it undergoes an initial public offering (IPO), selling ownership in itself by distributing shares on a public stock exchange. A company can distribute more shares at a later date if it needs to raise more capital or conversely buy back stock, reducing the shares outstanding. As such, shares outstanding is a number that changes often.
Use in Financial Analysis
Market capitalization is a calculation where one of the inputs is shares outstanding. Because shares outstanding is an input number as opposed to a calculation, it can be used in a variety of calculations in addition to market capitalization.
Other metrics in which shares outstanding provides useful information include earnings per share (EPS) and cash flow per share (CFPS). In theory, any number can be paired with shares outstanding to come up with a per-share valuation.