Aug 12 · 2 min read
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Market Capitalization, also known as Market Cap, is the total value of a company’s stock. Calculating a company’s market cap is easy, simply multiply the current stock price by the total number of outstanding shares of the stock. For example, a company with 50 million shares selling at $20 a share would have a market cap of $1 billion.
Although this calculation is simple enough, don’t worry about doing it yourself as it is usually shown in the summary statistics of a stock’s profile. Investors commonly use market cap to determine the relative value of a company. Market Cap is also used to help determine the risk and reward of buying one stock over another.
So, you may be wondering, why can’t I just look at a stock’s price to determine its value? For many reasons, a stock’s price can be very misleading when determining a company’s true value. Typically, there is a misconception that the higher a stock’s price is, the larger the company is. But this is not true. Because a company can decide to split their stock, which is where one share can be split into multiple shares or multiple shares combined into one, stock price can be very misleading. For instance, Apple is one of the most valuable companies in the world but is nowhere close to having the highest stock price due to multiple stock splits over the years.
When using market cap to determine the size of a company, you can classify any stock as either a Large, Mid, Small, Micro, or Nano cap stock. Large, Mid, and Small cap stocks are typically the ones you will hear about since Micro and Nano are generally risky penny stocks that do not meet the requirements of large exchanges around the world. A market cap of $10 billion or greater would be considered a Large-cap stock. A market cap of $2 billion to $10 billion would be considered a Mid-cap stock. And a market cap of $300 million to $2 billion would be considered a Small-cap stock.
Large-cap companies are generally dominant players that have built a strong reputation due to their excellent performance over time. This is why buying the stock of a Large-cap company is typically seen as a lower risk investment. Mid-cap companies are generally medium sized established companies competing in growing industries. Mid-caps have more growth potential than Large-caps but are typically a riskier investment. Small-cap companies are generally young companies looking to emerge within their industry. This is why Small-caps are seen as more risky than Large and Mid-caps but provide high growth potential.
To be a whyze investor, you should take into consideration the current value of a company before buying its stock. When creating a diverse portfolio of stocks, many investors like to invest in companies in different industries with varying market caps.
Stocks: The Basics