Market Capitalization or Market Cap indicates the total amount you need to have in hand, if you wish to buy the whole business.
Market Capitalization = Current Market Price * Number of Shares Outstanding
Let’s assume the company XYZ‘s Current Market Price is Rs 100 and the Number of Shares Outstanding (total number of shares traded in the market) is 50 Cr. The Market Capitalization is Rs 5000 Cr (Rs 100 * 50 Cr).
If you Want to buy the whole business (100% of the business), you need to have Rs 5000 Cr in your pocket.
How to use it practically?
You can rank the companies based on Market cap and then decide to invest in those companies.
If you are an investor who is willing to not take high risks in the stock market, investing in a high market capitalization company is the way for you. But the return expectation should be medium/low.
If you are willing to take high risks and are not fearful of volatility in the stock market, you can invest in smaller market cap companies. Usually, these companies don’t pay any dividends.