Company Market Capitalization
When you decide on the investment in a particular stock you should consider the size of the company that issues it. Additionally, you should decide on the amount of the money you would allocate. This is required since companies of different sizes react in a different way to market conditions and changes.
Company size can be classified in one of the two ways:
- by revenue
- by market capitalization (also known as market cap)
The first classification, namely by revenue, is rarely used. This is so since the differences observed from one industry to another usually distort the size of the company.
On the other hand, the most commonly used measure is the second one - market capitalization.
Market Capitalization Calculation
Use the following formula to estimate market cap:
Market cap = (number of outstanding shares) x (current stock price)
Example: Company X possesses 200,000,000 shares of common stock outstanding. The current market price for one share is $40. So, company X's market cap is $8.0 billion (200,000,000 x $40 = $8.0 billion).
By applying this formula to any other real company you will be able to measure its market cap to other companies' market cap.
Market capitalization can be easily found in the online resources by simply entering the symbol. The market cap should appear somewhere among the reported data.
Companies can be included in one of the following categories depending on their market capitalization:
$300 million and below ............... Micro Cap
$1 billion and below ................... Small Cap
$1 billion to $8 billion ................. Mid Cap
$8 billion to $100 billion .............. Large Cap
Above $100 billion ..................... Mega Cap
The categories listed above don't represent an obligatory classification. Many sources prefer the usage of just three categories: small, medium and large.
Stocks from companies with micro and small market capitalization are most volatile. They are also most susceptible to failure.
On the other hand, the high risk goes hand in hand with high potential reward.
Finally, the size of the company doesn't determine its potential for success. Small companies bring both high risks and high returns. On the other hand, being a large company has its advantages in the huge stock market.
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