What is market capitalisation and how is it used in UK investing?

Market capitalisation (or market cap) is calculated by multiplying a company's current share price by the total number of shares in issue. In the UK market, it is one of the primary criteria used by FTSE Russell to determine which companies enter and remain in the FTSE indices.

UK companies are broadly categorised by size. Large caps are those in the FTSE 100, which typically have market capitalisations above £5 billion, though the actual cut-off fluctuates with market conditions. Mid caps fall in the FTSE 250 (roughly £500 million to £5 billion), and small caps cover companies from the FTSE Small Cap index downward, including many AIM businesses.

The distinction matters because it affects liquidity, analyst coverage, and institutional ownership. A large-cap FTSE 100 stock is held by virtually every UK equity fund, is covered by dozens of analysts, and trades millions of shares each day. A small-cap AIM company may have a single market maker, minimal analyst coverage, and trade a few thousand shares on a quiet day.

FTSE Russell uses free-float market capitalisation rather than total market cap for index weighting. Free-float excludes shares held by founders, governments, strategic investors, and others deemed unlikely to trade. This gives a more accurate picture of the shares actually available to public investors and reduces the distorting effect of large locked-up stakes.

Understanding market cap also helps investors interpret index moves. A 5% swing in a £100 billion FTSE 100 constituent moves the index significantly more than the same percentage move in a £300 million FTSE Small Cap stock. When comparing funds or assessing an index's exposure, checking the weighted average market cap of its constituents reveals whether it is tilted toward giants or a broader mix.