When people first look at shares, the numbers can feel overwhelming. Prices move by the second, news headlines talk about “billions wiped off the market,” and investors constantly compare companies of different sizes. One figure that cuts through this noise is market capitalisation, often referred to as market cap. It is a simple calculation, yet it underpins how companies are grouped in the FTSE 100, how funds weight their holdings, and how investors think about scale and risk.
Understanding the meaning of market cap is not just for City analysts. For anyone with a stocks and shares ISA, a workplace pension, or a curiosity about how the UK markets work, knowing what market capitalisation (market cap) represents is a practical starting point.
In This Guide
What is Market Cap? What You Should Know
What Is Market Capitalisation?
Market capitalisation, or market cap, shows the total value of a company’s shares traded on the stock exchange. Investors use it as a quick way to judge the scale of a business. The calculation is straightforward: take the current share price and multiply it by the number of shares in issue.
If Tesco has one billion shares priced at £2 each, the result is a market cap of £2 billion. This number does not equal the company’s cash balance or annual profits. It reflects how the market values the firm at that point in time.
Market Cap in Practice
When investors talk about the “size” of a company, they are usually referring to its market capitalization. It shows whether a business is seen as a heavyweight, such as AstraZeneca, a mid-tier name like easyJet, or a smaller growth company listed on AIM.
Market capitalisation (market cap) is not the same as revenue or earnings. It represents what investors are prepared to pay for shares today. Because share prices move daily, a company’s market cap also changes, making it a shifting measure rather than a fixed one.
How Is Market Cap Calculated and Why It Matters
Market cap is calculated with a simple formula:
Market cap = Share price × Number of shares in issue
For example, Lloyds Banking Group has about 70 billion shares. At a price of 50p each, its market cap comes to £35 billion. This figure makes it easier to compare companies of different sizes, even when their share prices look very different.
The number also plays an important role in investing. Analysts use market cap as a quick filter to group firms into categories that suggest stability, growth potential, or risk. It also determines how businesses are placed in major indices such as the FTSE 100 or FTSE 250, which many UK funds and pensions follow closely.
Market Cap Segments
Investors often group companies by market cap to understand their scale, stability, and risk profile. These categories help compare businesses across different industries and also guide how indices such as the FTSE 100 or FTSE 250 are built. Each segment carries its own characteristics and potential trade-offs.
Large-cap firms are valued at tens of billions of pounds and are often household names like HSBC or Shell. They dominate their sectors, operate globally, and are usually considered the most stable investments. Many FTSE 100 companies fall into this group. They often pay dividends and attract long-term institutional investors.
Mid-cap companies typically have a value between £2 billion and £10 billion. Many are listed in the FTSE 250. They can offer a balance of stability and growth, with the potential to expand more quickly than large-caps but with greater share price swings. Investors often see them as firms in transition, moving from regional players towards broader markets.
Small-cap stocks, generally valued below £2 billion, are common on the London Stock Exchange and AIM. These firms can grow rapidly, but their smaller size makes them more sensitive to earnings surprises and market shocks. Trading volumes are often lower, which means their share prices can move sharply in response to news.
Micro-cap companies sit at the bottom of the scale, sometimes valued below £100 million. They are usually young or highly specialised businesses with limited resources. Because of their size, they are more volatile and can be difficult to trade in large volumes. While some investors are drawn by the possibility of high returns, the risks and uncertainty are much greater than in larger companies.
By recognising these market cap segments, beginners can see how company size influences risk, liquidity, and the role a stock might play in a diversified portfolio.
Market Cap vs Share Price
It is easy to mistake a low share price for a “cheap” company. On its own, the price tells you very little. A business with £1 shares could be larger than another trading at £100 if it has many more shares in circulation. Market cap fixes this by showing the total value of all shares combined.
Take Rolls-Royce and AstraZeneca as an example. Rolls-Royce may have a lower share price, but AstraZeneca’s overall market value is higher because of the number of shares and the scale of its operations.
What Affects Market Capitalisation?
Several factors can change a company’s market cap:
- Share price movements: Prices rise and fall daily, adding or wiping billions from valuations.
- New share issues: More shares in circulation increase the market cap, assuming the price holds steady.
- Share buybacks: Reducing the number of shares can push prices up and lift the market cap.
- Market sentiment: Confidence, fear, or wider economic shifts can drive valuations higher or lower.
Market Cap in the UK Context
In the UK, market cap plays a central role in how companies are grouped and ranked. The FTSE 100 is made up of the largest listed firms, while the FTSE 250 covers the next tier down. These indices are not just markers of prestige: they shape how billions of pounds are invested through tracker funds and pensions. When an investor buys into an FTSE 100 fund, their money is automatically tilted towards the companies with the highest market caps, such as Shell or AstraZeneca.
For individual investors using ISAs or workplace pensions, this matters because exposure is not evenly spread. Large caps dominate, while mid- and small-cap firms are weighted less. That balance provides stability but can also limit growth opportunities compared to funds that deliberately target smaller companies.
Market Cap and Risk
Company size often signals how much risk an investor is taking on. Large-cap firms usually have established businesses, global reach, and easier access to credit, which can reduce volatility. Smaller companies, by contrast, can be more exposed to economic shifts, competition, or regulatory changes.
However, market cap does not equal quality. Some large firms have collapsed after years of dominance, while many smaller players have delivered strong returns. Market cap is a way of categorising size, not a guarantee of performance or safety.
Common Misconceptions
- Market cap equals sale value: Buying all outstanding shares would cost the market cap, but real takeovers also account for debt, cash reserves, and control premiums.
- Share price shows company size: A £5 stock may represent a bigger company than one priced at £50, depending on how many shares are in issue.
- Market cap reflects profitability: A firm can post losses yet still hold a high market cap if investors believe in its future growth.
Market Cap and Index Weighting
Passive funds, such as index trackers, often weight holdings by market cap. This means the biggest firms receive the largest share of investment. For example, an FTSE 100 tracker puts far more into Shell than into smaller index members. While this reduces volatility, it also means portfolios can be heavily influenced by the performance of a handful of large companies.
Understanding how market cap drives index weighting helps investors see why their pension or ISA fund may mirror the movements of a few dominant stocks, and why adding mid- or small-cap exposure separately can create a more balanced portfolio.
FAQs
Most UK pensions and ISAs invest through index trackers. These funds follow indices that are weighted by market cap, so larger companies take up a bigger share of your money than smaller ones.
Yes. Because it is tied to share prices, a company’s market cap can rise or fall in a single day. Earnings updates, economic data, or unexpected news often drive these shifts.
It does. The 100 biggest companies by market cap on the London Stock Exchange make up the FTSE 100. The next 250 fall into the FTSE 250 index.
Not on its own. It shows size, but not financial health. To understand a business properly you also need to look at profits, debt, cash flow, and its position in the market.
Final Thoughts
Market capitalisation is one of the simplest ways to gauge a company’s size, yet it shapes how investors, funds, and indices are built. It connects the value of a single share with the broader worth of a listed firm.
For beginners in the UK, knowing how market cap works provides a useful starting point for comparing companies and understanding the make-up of the FTSE 100 and beyond. It is not a full measure of financial strength, but alongside earnings, revenue, and debt, it offers a foundation for building financial knowledge and assessing investments with greater context.
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