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There are many different factors to consider when determining the actual value of the individual shares of stock being offered for any publicly traded company, rather than simply basing your final decision solely on the listed stock price alone. Market capitalization, rather than stock price, is the true measure of a company’s price. The “market cap” of any company is achieved by multiplying the current list price for a single share of stock times the total number of outstanding shares that are offered by the company.
Sound confusing? It’s really very easy. If a company stock is currently selling at $20 per share and there are a total of 10 million shares of stock altogether, then the market cap is $200 million. Investors use this number, among other factors, to help determine the amounts of risk and growth that are potentially involved before acquiring stock in that particular company.
For example, if you were to look in the Wall Street Journal, you might find two companies with the exact same stock price, but because one company is very small and only offers 1 million shares and the other is perhaps General Electric or IBM with perhaps 10 billion shares outstanding, the risk and growth potentials will vary significantly between these two organizations. Market capitalization helps to level the playing field for the investor, allowing him to more easily compare and contrast between the two.
Once you have calculated your market cap, this number will fall into one of five various categories of market value.
Where your stock falls into these categories will help you to determine the safety values and growth potentials of the individual stock. There is — very generally — less risk with larger caps but also less potential for growth and higher returns. Which stock you finally choose will depend on your individual investment strategies.