Understanding Market Capitalization

Understanding Market Capitalization

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.

  • Micro Cap: Companies with a market cap of $250 million or less are considered micro caps. These are your smallest companies and usually carry significant amounts of risk.
  • Small Cap: Companies with a market cap of between $250 million and $1 billion are small caps. These tend to rate a bit better with investors when compared to micro cap organizations because they usually have a greater potential for growth, although this is never a guarantee.
  • Mid Cap: This is the middle range between large and small cap companies, ranging between $1 billion to $5 billion in market cap. These companies are often considered a bit safer than small cap companies while still leaving some significant room for growth potential.
  • Large Cap: These might be referred to as “Blue Chip Stocks”. Companies with a market capitalization number of between $5 billion to $25 billion fall into this category. The more conservative investors are usually attracted to these companies, perhaps planning to keep them long term in the hopes of achieving a steady but slower growth overall. Large caps might see severe fluctuations in stock price periodically, but tend to consistently bounce back.
  • Ultra Cap: Any company with a market cap over $25 billion is part of this Big Daddy category, also known as Mega Caps. These are the super large companies: IBM, Exxon Mobil, Apple, Coca Cola.

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.

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