Market cap, or market capitalization, is the total value of all a company’s shares of stock. It is calculated by multiplying the price of a stock by its total number of shares. For example, a company with 10 thousand shares selling at $50 a share would have a market cap of $500 thousand.
What Is Market Cap In Stocks And Why Is Market Capitalization Such An Important Concept?
It allows investors to understand the relative size of one company compared to another. Market cap measures what a company is worth on the open market, and the market’s perception of its future prospects.
Market cap, along with its volume, reflects what investors will pay for a company’s stock.
Another reason market cap is important is because it refers to the total value of all a company’s shares of stock, which puts the company in a category of either large, mid, or small cap.
What Is The Difference Between Large, Medium and Small Cap Companies?
- Large-cap companies usually have a market value of $10 billion or more. Large-cap firms often have a reputation for producing quality products and services.
Their reputation is of a history of consistent dividend payments and steady growth. They are many times dominant players within well-established industries, and their brand names may be familiar to consumers everywhere.
Because of these traits, investments in large-cap stocks may be considered more conservative than investments in small-cap or mid-cap stocks. This aspect potentially presents less risk in exchange for less aggressive growth potential.
- Mid-cap companies are mostly businesses with a market value between $2 billion and $10 billion. These businesses are established companies in industries experiencing or are on the horizon to experience faster growth.
These medium-sized companies may be increasing market share and improving their competitiveness in the marketplace. This stage of growth can determine if a company eventually lives up to its full potential.
Mid-cap stocks generally fall between large caps and small caps on their risk/return perspective. Mid-cap companies may offer more growth potential than large caps. Many times they can also offer investors less risk than small caps.
- Small-cap companies are those with a market value of $300 million to $2 billion. Most of the time these are young companies that serve niche markets or emerging industries.
Small caps are considered the most aggressive and risky of these 3 categories. Since small companies have low resources, this might make them more susceptible to a business or economic downturn.
They may also be vulnerable to the intense competition and uncertainties characteristic of untried markets. Small-cap stocks may offer investors high growth potential.
These long-term investors are usually the ones who can tolerate volatile stock price swings in the short term.
What’s The Difference Between Market Cap and Free-Float Market Cap?
Market cap is based on the total value of all a company’s shares of stock. Float is the number of outstanding shares for trading by the general public.
The free-float method of calculating market cap excludes locked-in shares. These are those shares held by company executives and governments.
Free-float market cap has been adopted by most of the world’s major market indexes, including the S&P 500 and the Dow Jones Industrial Average.
What Are Factors That Could Impact a Company’s Market Cap?
There are several factors that could affect a company’s market cap. One being large changes in the value of the shares. These changes could either be up or down.
Another factor affecting a company’s market cap could be changes in the number of shares issued. Any exercise of warrants on a company’s stock will increase the number of outstanding shares.
This in turn dilutes its existing value. As the exercise of the warrants is typically done below the market price of the shares, it could potentially affect the company’s market cap.
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