Market Capitalization vs. Shares Outstanding: What’s the Difference?

Market Capitalization vs. Shares Outstanding: What’s the Difference?

Both market capitalization and shares outstanding refer to public companies, as they have publicly listed shares, whereas private companies do not. However, there are relevant differences between the two. Let’s take a look at what the difference is between market capitalization and shares outstanding.

Key Takeaways

• 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.

What Is Market Capitalization?

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.

Changes in Market Cap

Market capitalization is not a fixed number—it fluctuates constantly based on stock price movements. Since the market cap is calculated by multiplying a company’s share price by the number of shares outstanding, any change in stock price directly impacts the company’s market value.

In addition to stock price changes, corporate actions like share buybacks can significantly impact market capitalization. A stock buyback occurs when a company repurchases its own shares from the open market, reducing the total number of shares outstanding. This can result in a stable or even increased market cap.

Secondary offerings, where a company issues additional shares to raise capital, can dilute existing shareholders and affect market cap in different ways. If the newly raised capital is used effectively for growth initiatives, such as acquisitions or expanding operations, it can increase investor confidence and potentially drive the stock price higher, leading to a larger market cap. However, if investors perceive the dilution negatively—especially if the offering is done out of financial necessity—it may put downward pressure on the stock price, potentially reducing the market cap.

Note

Market cap tells you how large a company is. The higher the market capitalization, the larger it is.

What Are Shares Outstanding?

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.

Changes in Shares Outstanding

Shares outstanding can change due to a variety of corporate actions. Companies may repurchase their own shares to reduce the number of shares outstanding. Meanwhile, stock splits increase the number of shares outstanding without affecting the company’s market capitalization.

One major distinction in shares outstanding is between basic and diluted shares. Basic shares outstanding refer to the total number of shares currently issued and held by investors, including those held by insiders but excluding potentially dilutive securities. Diluted shares outstanding account for all possible shares that could be created if stock options, warrants, or convertible securities were exercised.

Stock options and warrants are also two common instruments. Stock options allow the holder to purchase shares at a predetermined price. When employees exercise their options, new shares are issued. Warrants function like options but are issued directly by the company, often as incentives in financing deals.

Last, convertible securities also impact the diluted share count. These let investors convert their holdings into common shares under specific conditions. Their conversion could increase the number of shares outstanding.

Note

Two companies can have the same stock price but have wildly different market capitalizations. This means that one company is bigger than the other, even if both stocks trade for the same dollar amount.

Market Capitalization Vs. Shares Outstanding: What’s the Difference?

Market capitalization and shares outstanding are closely related but serve distinct purposes. Market cap is the total value of a company’s equity. Shares outstanding is the total number of shares issued and held by investors.

One key difference is that market cap fluctuates constantly with stock price movements, while shares outstanding change primarily due to corporate actions. Market cap can rise or fall based on investor sentiment, earnings reports, or broader economic conditions. The main way shares outstanding typically change is when companies issue new stock, conduct buybacks, or undergo stock splits. The function between the two is very different.

Another distinction lies in their role in investment analysis. Market cap is a primary indicator of company size and is used to compare firms across industries, helping investors assess risk and growth potential. Shares outstanding, however, are more relevant for financial metrics related to dilution effects. We’ll discuss this use in analysis in the next section.

Market Cap and Shares Outstanding Similarities

Market capitalization and shares outstanding are directly connected through the formula: Market Cap = Stock Price × Shares Outstanding. In short, you must know the shares outstanding in order to calculate market cap.

Both market cap and shares outstanding reflect a company’s size and investor perception but in different ways. Market capitalization provides a broad measure of a company’s worth in the stock market, while shares outstanding indicate how ownership is distributed. As both are an indicator of value, the interplay between these two factors determines how a company is valued relative to its peers.

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.

What Is Market Capitalization?

Market capitalization is the total value of a company’s outstanding shares, calculated by multiplying the stock price by the number of shares outstanding. It represents the company’s overall worth in the stock market.

What Are Shares Outstanding?

Shares outstanding refer to the total number of shares a company has issued that are currently held by investors, including both public and restricted shares. This number changes due to corporate actions like stock buybacks or new share issuances.

How Are Market Capitalization and Shares Outstanding Related?

Market cap is directly calculated using shares outstanding; you find market cap by calculating the stock price with the shares outstanding. While stock price changes frequently, the number of shares outstanding typically changes less often due to corporate actions.

Can a Company Have a Low Stock Price but a High Market Cap?

Yes. If a company has a large number of shares outstanding, even a low stock price can result in a high market cap. 

Why Is Market Cap a Better Indicator of Company Size Than Stock Price?

Stock price alone does not reflect a company’s size, as it does not account for the number of shares outstanding. Consider an example of Firm A with 1,000,000 shares, each worth $100. That company would be worth magnitudes more than a company with 10,000 shares each worth $100.

The Bottom Line

Market capitalization and shares outstanding are closely related but serve different purposes in evaluating a company’s value. Market cap represents the total worth of a company in the stock market, calculated by multiplying the stock price by shares outstanding, while shares outstanding refer to the total number of issued shares held by investors.