Macro Mondays: Market Cap(italization)
Welcome to Macro Mondays once again! You may hear the term "cap" thrown around in articles about the stock market (we talk a lot about them here) but what exactly does that mean? Market capitalization is a quick and easy way to determine the size of the company that issued the stock, and this heavily impacts its risk level.
Just because a company issues stock, doesn't mean it is a safe stock. You may know the company well, but the company might be so small in the stock market that very few investors are willing to buy and sell shares. That's why understanding market caps is so important.
To learn more on market capitalization, be sure to check out Investopedia by CLICKING HERE!
What is 'Market Capitalization'?
Market capitalization refers the total dollar market value of a company's outstanding shares. Commonly referred to as "market cap," it is calculated by multiplying a company's shares outstanding by the current market price of one share. The investment community uses this figure to determine a company's size, as opposed to using sales or total asset figures.
How do investors use market capitalization?
Using market capitalization to show the size of a company is important because company size is a basic determinant of various characteristics in which investors are interested, including risk. It is also easy to calculate. A company with 20 million shares selling at $100 a share would have a market cap of $2 billion.
Companies can be ranked according to their market capitalizations, and the general format is to rank them as large-cap, mid-cap and small-cap companies. There are basic criteria for putting companies in these categories, but there may be some differences depending on the market in which the company trades and is being ranked.
What is the difference between Large, Mid and Small Cap?
Large-cap companies typically have a market capitalization of $10 billion or more. These large companies have usually been around for a long time, and they are major players in well-established industries. Investing in large-cap companies does not necessarily bring in huge returns in a short period of time, but over the long run, these companies generally reward investors with a consistent increase in share value and dividend payments. An example of a large-cap company is International Business Machines Corp.
Mid-cap companies generally have a market capitalization of between $2 billion and $10 billion. Mid-cap companies are established companies that operate in an industry expected to experience rapid growth. Mid-cap companies are in the process of expanding. They carry inherently higher risk than large-cap companies because they are not as established, but they are attractive for their growth potential. An example of a mid-cap company is Eagle Materials Inc.
Companies that have a market capitalization of between $300 million to $2 billion are generally classified as small-cap companies. HMS Holdings Corp. is an example of a small-cap company. These small companies could be young in age and/or they could serve niche markets and new industries. These companies are considered higher risk investments due to their age, the markets they serve, and their size. Smaller companies with fewer resources are more sensitive to economic slowdowns.
In order to make an investment decision, you may need to factor in the market cap of some investments.