Market capitalization (or market cap) is a common metric that investors can use to define the size of a company. The formula for calculating market capitalization is to multiply a company’s number of outstanding shares by its share price.
However, as noted above, market cap only directly measures the size of a company. The value of a company includes many other factors, some of which are intangible and can mean something very different to individual investors. This is an important distinction. Because while a company may have significant value in the stock market, that doesn’t necessarily mean it should be in your portfolio.
In this article, we’ll look at what market capitalization is and how it’s calculated. The article will also list the companies that have a trillion-dollar market cap (as of August 2022) and offer some of the benefits and one potential risk of owning these stocks.
What is Market Capitalization?
A company’s market capitalization (or market cap) is calculated by multiplying the value of a single share by the number of total shares outstanding (i.e. the number of shares available to be publicly traded). Here are two examples:
Company A = has 1,000,000 outstanding shares that sell at $100 per share. Its market cap is $100 million dollars.
Company B = has 10,000,000 outstanding shares that sell at $80 per share. Its market cap is $800 million dollars.
What Does Market Capitalization Mean to Investors?
Market capitalization assigns a value to a company’s stock that goes beyond its stock price.
In our examples above, company B is the much larger of the two companies, even though company A’s stock costs more per share.
This illustrates an important point. The market sets the price of a stock. However, it’s up to individual investors to decide whether the value of owning that stock is worth the risk.
What Can Make a Company’s Market Capitalization Increase?
Since market capitalization is based on the volume of outstanding shares and the price per share, a change in either one will cause a market cap to rise or drop. With that said, there are two common ways that a company’s market cap may increase:
- An increase in stock value (i.e. for their price per share to rise) - This essentially means a company meets or exceeds performance expectations and is rewarded by having investors want to buy shares of their company, which in turn drives up the price of each share.
- A company issues more shares of its stock - This is typically done because the company is looking to raise capital. At first, investors may see a slight dilution in share price as more shares are put on the market, but the market cap would still increase.
What Can Make a Company’s Market Capitalization Decrease?
Using the same two variables of price per share and volume of outstanding shares, let’s look at how a company’s market cap could decrease.
- A decrease in stock value - This essentially means the company did not meet performance expectations which may cause investors to sell, which in turn drives the price per share down.
- A stock buyback – Occasionally companies may engage in the practice of buying back some of their outstanding shares in an effort to improve shareholder value. This will make a company’s market cap go down as this example shows:
A company has 1,000,000 outstanding shares valued at $50 per share. They have a market cap of $50 million dollars. They buy back 100,000 shares. Their new market cap is:
900,000 x $50 = $45 million
In reality, the amount that the market cap drops may be less because a company is buying back shares in anticipation of their stock price going up. And even if the stock price doesn’t increase, if you already own stock in the company, your relative ownership stake will increase because there will be fewer claims, or shares, on the earnings of the company.
How Exclusive is the $1 Trillion Market Cap Club
The list of companies with a $1 trillion market capitalization is very small. In fact, less than 10 companies have achieved the milestone. And only a handful of companies have maintained that market cap.
Achieving a trillion dollar market cap is more impressive when you consider that in 1901, U.S. Steel under the leadership of John Pierpont Morgan (i.e. J.P. Morgan), became the first company to attain a $1 billion market cap. However, it took over 100 years for a company to reach the $1 trillion market cap.
How Many Companies Currently Have a $1 Trillion Market Cap
As of August 1, 2022, there are only four U.S. companies with a market cap of $1 trillion or higher. They are:
As of this writing, Tesla (NASDAQ:TSLA) and Meta Platforms (NASDAQ:META) have briefly hit the trillion dollar market cap mark. But the market cap of each company has dropped below the threshold. Additionally, this list only includes U.S. companies because these are companies are accessible to retail investors. That is why Saudi Aramco is not on this list although the company has a market cap of over $2 trillion.
Which Company Was the First to Reach a $1 Trillion Market Cap
Of the companies that currently have a trillion-dollar market cap, Apple was the first U.S. company to achieve that distinction. However, PetroChina is recognized as the first company to have hit the milestone in 2007.
What Are the Common Attributes of Trillion-Dollar Market Cap Companies?
Not surprisingly, the current members of the $ 1 trillion market cap club are some of the biggest names in the fast growing, and ever-evolving technology sector. In addition to belonging to the same sector, these companies share some other common attributes:
- They exert significant financial influence – The United States economy receives significant revenue from this company through tax, duties, and other government tariffs.
- They may have significant social influence – These companies will generally invest more into the communities in which they do business with job opportunities, scholarships, etc.
- They inspire other companies to do the same – Achieving the trillion dollar market cap gives other companies a target to shoot at.
Are There Any Risks Involved in Investing in Trillion-Dollar Market Cap Companies?
Although there are not many tangible risks to investing in companies with such a large market cap, there are two areas of potential concern:
- They can be too big to control – Because they have an outsized impact on the national and global economy, these companies could be tougher to regulate. That’s because when these companies have to let employees go, it can have an outsize effect of the broader economy.
- They can capture an outsize amount of investor dollars – The popularity of tech stocks and the growth of these stocks can disproportionately affect the amount of investment dollars available to other companies.
What Companies May Be the Next to Reach a $1 Trillion Valuation?
Tesla may be able to reclaim a $1 trillion market cap due to the emerging transition towards electric vehicles. Because of its influence as a global payment processor, Visa (NYSE:V) is also considered to be a candidate to join the club. And in the semiconductor sector, Nvidia (NASDAQ:NVDA) with a market cap of over $460 billion is also considered to be a potential candidate to eventually reach a $1 trillion market cap.
Some Final Thoughts on Investing in Companies with a $1 Trillion Market Cap
No matter how you think about it, one trillion dollars is a lot of money. It wasn’t that long ago when a company with a one billion market capitalization represented the gold standard. But time, and the rapid expansion of technology, has allowed several companies to crack the $1 trillion market cap.
With that said, only a handful of companies have a $ 1 trillion market cap and all of them are part of the fast-growing technology sector. These companies all have tremendous financial and social influence on the global economy. But that size also means that a drop in their share price can have an outsized effect on investors.
MarketBeat All Access