Yahoo U: Market cap

Yahoo Finance’s Brian Cheung breaks down market cap in this week’s Yahoo U.

Video Transcript

AKIKO FUJITA: It is time for this week's lesson in Yahoo U. Today, we are talking about market cap. And as always, Yahoo Finance's Brian Cheung here to lead the class for us. Brian?

BRIAN CHEUNG: Well, Akiko, class is in session. And today, we're talking about market caps. Now, I'm actually going to guess that most of our viewers already know what a market cap is, right? It's how big a company is. But what's fascinating about market caps is it also tells us something about the market itself. Wait, what?

All right, well, let's take a step back first. So market capitalization is calculated as the stock price multiplied by the total number of outstanding shares. And you can easily find these figures on our Yahoo Finance site, shameless plug.

So if a stock, for example, is, let's say, $20, right, and there are 1 million outstanding shares out there-- again, sorry, for my terrible handwriting. Pretty easy calculation here. The market cap is going to be 20 times a million. That's $20 million.

Now, of course, companies come in all market caps and all different types of shapes and sizes. And there's no SEC definition for this. So again, the definitions are going to depend on who you're asking broadly. But a large company is defined as those above $10 billion in market cap, whereas midsize is going to be between $2 and $10 billion. And then small, broadly, is going to be between $300 million and $2 billion.

Now, there's also kind of subgroups within these. So mega-cap companies, which would be a subgroup of large, would be those above $200 billion, for example. And then anything that's smaller than $300 million might be referred to as a micro-cap company.

All right, so here's the question, though. When we talk about the market, when you see us on Yahoo Finance quote the S&P 500, who's covered in that? Is it just large? Is it large and medium? Is it large, medium, and small? Are there any small companies in there?

Well, the range is pretty large, as you can imagine. And market cap, as I explained, will fluctuate day to day because of the stock prices. But as of earlier this week, the largest cap stock in the S&P 500 by weighting was Apple. And their market cap's about $2.2 trillion. So that not only makes them a mega-cap, that makes them, like, a mega-mega-cap company.

Now, the smallest stock, for example, that's weighted in the S&P 500 is a company called Hollyfrontier Corporation. It's a petroleum refiner that's based in Texas. And their market cap, only $5.6 billion. That's about 400 items smaller than Apple. So again, that means that Hollyfrontier is actually mid. Well, it's actually the middle of the mid, again, between $2 and $10 billion, which means that there are no small caps covered in the S&P 500.

So the question is, where might we see some small caps? And for that, we have to zoom beyond the S&P 500, which is why we have something called the Russels. And the Frank Russell company came up with this in the 1980s. And the Russell 3000 is not a rapper. It's the universe of the 3,000 largest US-traded stocks. This is going to include a lot of smaller companies but also the bigger fish like Apple.

So let's say, for example you lined up all the companies from smallest to largest. Again, the largest 1,000 companies would be covered under Russell. The smaller 2,000 companies after that would be in the Russell 2000. So if you want to see how small caps are doing, you're going to look at the Russell 2000, which is just those small cap companies.

Now, of course, by definition, it's, of course, the large stocks that are the major market movers. And that's why when we talk about the market on our programs when we look at the Dow or the S&P 500, that's a pretty good proxy for those large companies. But again, it doesn't cover those smaller micro-cap companies, which could have a completely different growth potential. It's something very important for investors to keep in mind when they look at the market but also try to cherry pick the stocks that they own. And that is this week's Yahoo U.