Shares Outstanding and Market Capitalization

Why this matters

New investors often assume a $500 stock is "expensive" and a $5 stock is "cheap." Neither statement means anything until you know how many shares exist. This lesson gives you the one multiplication that fixes that misunderstanding for good.

Shares outstanding

Shares outstanding is the total number of a company's shares held by all its shareholders, including the public and insiders. It isn't fixed. It rises when a company issues new shares and falls when it buys shares back, which the next two lessons cover.

Market capitalization

A company's market capitalization, or market cap, is its total value in the stock market: the current share price multiplied by the number of shares outstanding.¹

Market cap = share price × shares outstanding

Company	Share price	Shares outstanding	Market cap
Alder	$500	10 million	$5 billion
Birch	$50	1 billion	$50 billion

Both companies are fictional. Alder's shares cost ten times as much, yet Birch is ten times bigger. A high share price usually just means a company has relatively few shares, not that it's large, valuable, or overpriced.

Market cap changes every moment the share price does. It's the market's current valuation of the company's equity, not a measure of what the business is truly worth, a distinction Price vs. Value covers in Part 4.

Large, mid, and small

Companies are often grouped by market cap into large-cap, mid-cap, and small-cap. There's no single official set of dividing lines. Index providers and fund companies each draw them in their own way, so check how a particular fund or index defines them. Size matters because smaller companies tend to be less established and more volatile, while the largest companies dominate market-cap weighted indexes, as Market Indexes: What "The Market" Means showed.

Not every share trades

Some shares are held by founders, other companies, or governments that aren't likely to sell. The shares actually available to investors are sometimes called the float. Some index providers count only these: the S&P 500, for example, uses share counts that exclude shares held by other publicly traded companies, government agencies, and certain strategic shareholders.²

Why the share count matters for per-share numbers

Many figures you'll see are "per share," such as earnings per share, a company's profit divided by its number of shares. The share count changes those numbers even when the business doesn't change.

	Company with 50 million shares	Same company with 100 million shares
Yearly profit	$100 million	$100 million
Earnings per share	$2.00	$1.00

The business earns the same either way. Each share's slice of the profit is simply half as big when there are twice as many shares. That's why you'll always compare per-share figures with the share count in mind, starting in Part 3.

Key takeaways

• Shares outstanding is the total number of shares held by all shareholders, and it changes over time.
• Market cap = share price × shares outstanding. It's the market's current value of the company's shares.
• A high share price doesn't mean a big or expensive company.
• Per-share figures like earnings per share depend on the share count as well as the business.

Check your understanding

Company X trades at $20 with 2 billion shares. Company Y trades at $400 with 50 million shares. Which has the larger market cap?

1. Company Y, because its share price is higher.
2. Company X: $40 billion versus $20 billion.
3. They're the same size.

A company's profit stays the same, but it issues many new shares. What happens to earnings per share?

1. It falls, because the same profit is divided among more shares.
2. It rises, because the company now has more shareholders' money.
3. It doesn't change, because the business itself didn't change.

What's next

Companies with spare cash can hand it to shareholders in two main ways. The next lesson, Dividends and Buybacks, compares them.