What Is Market Capitalization?
Market capitalization sometimes referred to as a market cap, is the total value of a publicly traded company’s outstanding common shares owned by stockholders. Market capitalization equals the market price per common share multiplied by the number of outstanding shares. It is one of the most important characteristics of a company and is useful for prospective investors in understanding the risks of investing in company stocks.
Understanding Market Capitalization
Understanding what a company is worth is an important task and often difficult to quickly and accurately ascertain. Market capitalization is a quick and easy method for estimating a company’s value by extrapolating what the market thinks it is worth for publicly traded companies. In such a case, simply multiply the share price by the number of available shares.
After a company goes public and starts trading on the exchange, its price is determined by supply and demand for its shares in the market. The price will increase if there is a high demand for its shares due to favorable factors. If the company’s future growth potential doesn’t look good, sellers of the stock could drive down its price. The market cap then becomes a real-time estimate of the company’s value.
How to Calculate Market Cap?
The investing community often uses market capitalization value to rank companies and compare their relative sizes in a particular industry or sector. To determine a company’s market cap, simply take its current market share price and multiply the figure by the total number of shares outstanding.
Market Cap = Current Share Price * Total Number of Shares Outstanding
Market Capitalization Categories
Based on market cap, companies may be classified as large-cap, mid-cap, or small-cap. These are described in greater detail below.
1.Large-cap
Large-cap companies are usually stable, reputable, well-established businesses with a significant market share. They have market caps of INR 10,000 crore or more. Due to the low volatility in comparison with mid-cap and small-cap stocks, the risk associated with investing in the stocks of large-cap companies is very low. However, the downside is that these stocks’ growth potential is also low. Examples of large-cap companies—and keep in mind that this is an ever-changing sample—are Apple Inc., Microsoft Corp., and Google parent Alphabet Inc.
2.Mid-Cap
Companies generally have a market capitalization of between $2 billion and $10 billion occupying the middle ground between large and small companies. 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. While the risk of investing in these companies is higher than investing in large-cap companies owing to the increased volatility of their stocks, they tend to have higher growth potential. One example of a mid-cap company is Eagle Materials Inc.
3.Small-Cap
Companies with a market capitalization of between $300 million to $2 billion are generally classified as small-cap companies. These small companies could be younger, 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.4 Smaller companies with fewer resources are more sensitive to economic slowdowns.
As a result, small-cap share prices tend to be more volatile and less liquid than more mature and larger companies. At the same time, small companies often provide greater growth opportunities than large caps. Even smaller companies are known as micro-cap, with values between approximately $50 million and $300 million.
Why market capitalization is an important concept
Market capitalization is important because it allows potential investors to understand the true value of companies and the size of one company to another. It helps investors predict the future performance of a company’s stock because it reflects what the market is willing to pay for the stock.
With the knowledge of the market caps of various companies, investors can make better-informed decisions about the types of stocks they would want in their portfolios by their investment plans. Over a long enough period, large-cap, mid-cap, and small-cap stocks have the potential to lead the markets due to being differently affected by changes in the economy. For this reason, investors prefer to have a diverse portfolio consisting of a well-balanced mix of these three types of stocks.
What Are the Factors Which Impact Market Caps?
There are quite a few factors that impact the market cap of a company. Learning these factors can aid investors in judging if a specific company is expected to offer good returns.
- Demand for the products or services of an institution and its ability to serve that demand are both crucial factors that impact the MC of a company.
- Fluctuations in the market can impact the MC. This can be in a specific industry, economic downturn, or both.
- Exercising warrants on the stocks of an enterprise can reduce its value.
- Performance and ingenuity of competitor brands or institutions.
- The reliability and the reputation of a company.
The number of outstanding shares of a company depends on factors like buying back shares or issuing new shares. In case of stock splits to issue new shares, a company’s market capitalization remains unchanged.
While understanding the impact of different factors on the MC, it is also advisable for investors to understand how investments grow or decline over the years.
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