What is Market Capitalization
Market Capitalization (also known as market cap) is simply the total currency value of all the company’s stocks outstanding. It is calculated by multiplying the number of total Stocks outstanding by the current price of the traded stock right now.
Market Capitalization is used as an indicator of the size of a company and risks associated with it.
All companies start as an Idea, at which point their market cap is zero. As Ideas turn into actions and some profits or investors’ trust are gained, share price begins to rise.
A great company, led by a great manager will compound its value many times over during many years of progress, taking its shareholders on a wealth-generating journey with it.
Nano Cap (Or Penny stocks)
At the lowest spectrum, companies – private or public, have a very low Market Cap, usually lower than 50 million. This is where all companies start. These are called Nano Cap’s and sometimes Penny stocks.
These kinds of companies are traded (when public) on special platforms with very little supervision and regulation – if any.
They are Not liquid because of a lack of ready and willing investors to purchase them and are not covered by the financial media.
While the vast majority of these are usually questionable companies at best, fine screening of the Nano Cap sector by a knowledgeable and patient investor can on occasion reveal some highly attractive, profitable, growing companies ignored by the typical investor crowd.
These companies are usually extremely high-risk, high-reward investments and their stocks can move in double digits daily without notice.
Within Wall Street, there are small investing boutiques who may invest in these segments in contrast to the lower nano cap, which is dominated by the retail investor base.
Liquidity is better with the Micro Cap segment, but one should understand that they are dealing with developing businesses that may not be as resilient as larger companies.
Above 300 million and up to 2 billion market cap one finds the Small Cap.
These are businesses that are more established than their nano and micro counterparts, as their Market Cap is sufficiently large. Wall Street funds follow these better, and one would find good liquidity investing in them.
Between 2 billion and about 10 billion Market Cap exists the Mid Cap segment of the market. Here exist those companies that have been doing well for some time now, growing and expanding into this size.
These companies are not only sufficiently liquid, but they have a more profitable stable future allowing investors to reduce the amount of risk they take when investing.
Between 10 billion and 100 billion Market Cap exists the Large Cap segment and its members are usually known and respected businesses that have been doing very well for a very long. These businesses are mature and many times are considered very safe, steady investments.
Above the 100 Billion Market Cap exist the Mammoths of the Public Companies – the Mega Caps. These are the massively large and known businesses: the Apples, the Exxon Mobils, the Berkshire Hathaways, the Googles, and the Microsofts of the world, having attained their status after many-many years of steady, profitable growth they have come to dominate their industries.
Due to the way Market Cap is calculated, it has all the frailties discussed in our previous tip about Price/Earning Ratio, so one should consider these when thinking about Market Cap.
In addition, one should always keep in mind that since an investor is, in fact, purchasing part of a business, there are additional factors they should pay attention to when determining the total value of the business – factors that can result in a large difference between the total Enterprise Value and the Market Cap.
To learn more, you might want to review the video on Enterprise Value.« Back to Glossary Index