Market capitalization represents the total value of a company. It is calculated by the stock price multiplied by the number of shares issued. It is usually shortened as a market cap. To help you purchase the right stock, consider these types of market cap.
Types of market cap
There are three most common types of market cap.
Small-cap
They are the companies with a market cap of less than $1 billion. These are the companies which have just gone through initial public offering and they are usually smaller and young stock companies.
People usually refer to the small-cap as a micro-cap. The stocks from these companies are riskier since they have a higher chance to default on a downturn. Yet, these stocks have a huge room to grow in the stock market. Investing in small-cap can make you become profitable.
Mid-cap
Compared to small-cap companies, mid-cap companies are less risky. But, they may not have the same potential growth. These are the companies with the capitalization between $1 billion to $5 billion.
Studies proofed that these mid-cap companies outperformed both large-cap and small-cap stocks for these 20 years.
Large-cap
Large-cap companies are the ones with a market cap of $5 billion or more. They have the lowest risks since they usually have financial resources even during the downturn. These companies usually the market leader, yet they have lesser room to grow.
Therefore, they usually have a lesser return than the small or mid-cap stocks. At the same time, these companies reward their stockholders with dividends.
The importance of the market cap
Market cap is one of the good ways to value a company, quickly. The main reason for that is because the stock price usually formulated based on the investors’ expectations of the company’s earnings. Rising the company’s earning means stock traders will bid more for the stock price.
However, the market cap can be a great way to value a company only if they all have the same price to earnings ratio. Yet, investors consider some industries as a slow-growing or even stodgy.
Yet, in choosing the right stocks for your investment market cap still can be your fastest way to value those companies. you can also value the cap before you do a stock split.
