Market Cap vs. Share Price: What Actually Matters?

One of the most common misconceptions among new investors is that a stock with a low share price is "cheap" and a stock with a high share price is "expensive." This is completely wrong. It's like saying a 12-inch pizza cut into 8 slices is cheaper than a 12-inch pizza cut into 4 slices.

The Pizza Analogy

Imagine a pizza.

• Scenario A: You cut the pizza into 4 slices. Each slice costs $5. Total pizza cost: $20.
• Scenario B: You cut the pizza into 8 slices. Each slice costs $2.50. Total pizza cost: $20.

Is the slice in Scenario B "cheaper"? No. It's just a smaller piece of the same pie.

Share Price is the price of one slice.
Market Capitalization (Market Cap) is the price of the whole pizza (the whole company).

The Formula

Market Cap = Share Price × Total Number of Shares

Why It Matters

A company trading at $10 per share with 1 billion shares is worth $10 billion.
A company trading at $1000 per share with 1 million shares is worth $1 billion.

The $1000 stock is actually the smaller company! It has more room to grow (potentially) than the $10 billion giant.

Categories of Market Cap

Investors categorize companies by size to understand risk and potential return.

• Mega Cap ($200B+): The giants (Apple, Microsoft). Very stable, lower growth.
• Large Cap ($10B - $200B): Established industry leaders.
• Mid Cap ($2B - $10B): Established but with more room to grow.
• Small Cap ($300M - $2B): Higher risk, higher potential reward.
• Micro Cap (Under $300M): The "Wild West." Extremely volatile.