When people say Apple is a "$3 trillion company" or Tesco is a "£10 billion company," they're talking about market cap. It's not what the company owns, what it earns, or what you could buy it for — it's purely what the market collectively believes the company is worth right now.
The formula
If a company has 10 million shares and each trades at £5, its market cap is £50 million. If the share price doubles to £10, the market cap doubles to £100 million — even though nothing about the underlying business has changed.
The three size categories
What market cap tells you — and what it doesn't
Market cap is great for quickly comparing company sizes and understanding which index funds will include a company. But it has important limitations:
- It doesn't reflect what you'd pay to buy the whole company. A takeover bid must account for debt and cash too — that's called enterprise value.
- High market cap doesn't mean a good investment. A company can be very large and still be overvalued.
- It changes every second as the share price moves — a company can fall out of the FTSE 100 and back in the same year.
What this means for you
Market cap determines what goes into the index funds you probably own. FTSE 100 trackers hold the 100 largest UK companies by market cap; S&P 500 funds hold the 500 largest US ones. When a company's market cap falls enough, it gets "relegated" — dropped from the index — and all the index funds are forced to sell it. This is why index inclusion and exclusion can move share prices dramatically.