Meaning Of Market Capitalization
Market capitalization, commonly called market cap, is the market value of a publicly traded company's outstanding shares. The market capitalization of a company is equal to the price of a share multiplied by the number of shares currently outstanding. A company's capitalization can be used as an indicator of public opinion of its net worth because outstanding stock is bought and sold on public markets. It can also be used in some forms of stock valuation because outstanding stock is bought and sold on public markets.
How to Calculate Market Capitalization
To figure out a company's market value, take the number of shares of stock the company has and multiply it by the price of one share at the end of the day.
Market cap = Share Price x # Shares Outstanding
#= Number of
Importance of Market Capitalization
Market capitalization is a quick way to figure out how big a company is and how risky it is to invest in that company. People who work in the financial sector, like financial advisers, should know these important things about market capitalization. It is likely that people who are in the stock market will use research on the market capitalization of companies to help them decide where to put their money. Differences in the size of a stock's market capitalization usually mean that it has a different level of risk. Large, mid, and small-cap stocks are usually mixed together in portfolios to make them more stable. So, this lets people who want to be able to take some risks but balance that risk with steady stocks that don't make a lot of money.
Type of Market Capitalization
Mega-cap: The largest corporations are represented at this level. Mega-cap companies are typically those with a market capitalization greater than $200 billion, and they are frequently the most conservative investments for investors. Because of the large size of a mega-cap company, it will typically provide a low but consistent return on investment.
Large-cap: Large-cap companies are those with a market capitalization ranging from $10 billion to $200 billion. When it comes to investing, large-cap companies are often a safe bet because they are large enough to provide investors with a sense of security and consistency.
Mid-cap: Mid-cap companies are those with a market capitalization ranging between $2 billion and $10 billion. Mid-cap companies provide a middle ground between the conservative, slow growth of mega-cap and large-cap investments, while still remaining relatively safe investments in the long run. It is important to research mid-cap companies and examine their financial histories before deciding how much money to put into them.
Small-cap: Small-cap companies have a market capitalization ranging from $300 million to $2 billion. These businesses are typically much younger than their counterparts at higher levels. It is risky to make an investment in a small-cap company, but the rewards can be substantial as the company grows and increases in overall value. This is another level that necessitates extensive research before making a decision.
Micro-cap: Generally speaking, micro-cap companies have a market value between $50 million and $300 million, and they present the same risks and opportunities as small-cap companies. Frequently, the financial sector will not distinguish between micro-cap and small-cap companies, instead classifying all companies at these two levels as part of the small-cap category.
Nano-cap: Publicly traded companies with a market capitalization of less than $50 million are referred to as Nano-cap companies or micro-cap companies, which are sometimes used interchangeably. Nano-cap companies are among the most risky to invest in, but they are also becoming increasingly popular.