Market Capitalization – Meaning and How to Calculate?
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There are many ways to help you determine the value of a company, and the simplest way is to look at the market value of the business (also known as market capitalization). However, not everyone knows how to price and understand what market capitalization is. In the article below, we will provide the most basic information about market capitalization and what it means in stock investing.
What is market capitalization?
Market capitalization measures the size of a business, determined by the total amount of money spent to buy back the entire company in current conditions.
The formula calculates market capitalization:
Market capitalization = number of shares x market price of 1 share
Example: A company with 20 million shares selling for $100,000 per share would have a market capitalization of $2 trillion.
Share prices will depend on many factors such as profitability, assets, risk, outlook, and crowd sentiment. Therefore, depending on the performance of the business or stock price movements, market capitalization can change. When the share price increases, the market capitalization also increases. When the share price decreases, the market capitalization of the company also decreases.
Why does market capitalization matter?
Investors often look to market capitalization as a reference factor in investment decisions when participating in the stock market.
Specifically, market capitalization tells us how big or small a business is, thereby determining the value of the industry and the actual value of a stock traded in the market. Based on these factors, investors can decide whether to invest or not.
In addition, market capitalization is also influential in determining a business’s risk level and growth potential. The higher the capitalization, the smaller the risk, and vice versa. The smaller the capitalization, the higher the risk.
To make it easier to imagine, think of a tree: large trees represent large-cap businesses, small trees represent small-cap businesses. Comparing the level of risk, it is clear that large trees are more able to survive and cope with nature than small trees. However, in terms of future growth potential, small trees are more likely to increase and develop.
The stock market is similar. A company with a large market capitalization will be the safer choice for investors because of its sustainability and stable income. Smaller companies with low market capitalization offer more attractive profit opportunities because of their ability to increase from start-ups.
Classification of stocks based on market capitalization
Common stocks are classified by market capitalization as follows:
- Micro-cap: the market capitalization of the business is less than 250 million USD. These are stocks of small companies with an extremely high level of risk.
- Small-cap: The market capitalization of a business fluctuates between $250 million and $1 billion, is a stock of young companies with significant growth potential but the risk of failure. Failure is also relatively large.
- Mid-cap: The market capitalization of a business ranges between $1 billion and $5 billion. Stocks of companies are expected to have rapid growth and low risk than small-cap stocks.
- Large-cap: market capitalization of a business between $5 billion and $25 billion, referring to large companies with steady growth and low risk, such as Wal- mart, Microsoft.
- Mega cap (also known as a super cap): a market capitalization of a business over $25 billion, refers to the largest companies in the financial markets today, such as Berkshire Hathaway, Google, Amazon, General Electric, and Exxon Mobil.
These numbers will also change over time because the stock market will always appreciate in the long run, and the capitalization of companies will grow larger.
While market capitalization is a significant factor in making investment decisions, it is not everything. As an intelligent investor, you need to use a combination of information, technical analysis, and fundamental analysis to determine a good and profitable stock.