What is Market Capitalization?
Our ‘What is Market Capitalization?’ video explores Market Cap fundamentals, types of market capitalization based on size, and its place in global stock markets.
Market Capitalization is a core calculation made by investors to sense check and diversify their investment portfolio based on perceived risk versus return.
TIMESTAMPS:
00:00 - Market cap definition
00:33 - How is market cap calculated
00:57 - Market cap classifications
1:55 - What makes market cap go up?
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What is Market Capitalization?
Market capitalization, or market cap for short, is one of the most important metrics in the world of stock investing.
Understanding how a company’s market cap is calculated is essential for any serious investor engaging in fundamental due diligence.
Market cap serves as a useful indicator for investors to assess a company's scale, while also providing valuable insights into its stability and level of risk.
Now, let's dive into how the market cap is calculated.
In stocks, the calculation is relatively straightforward. Market cap is determined by multiplying the number of shares outstanding by the stock price.
For example, if there are 1 million shares outstanding, and the stock price is $100, the market cap total equals $100 million.
Companies are often categorized based on their market capitalization into various groups such as mega-cap, large-cap, mid-cap, small-cap, or micro-cap. The specific criteria for each classification may differ, but typically, they are classified as follows:
mega-cap: market value of $200 billion or more;
large-cap: market value between $10 billion and $200 billion;
mid-cap: market value between $2 billion and $10 billion;
small-cap: market value between $300 million and $2 billion; and
micro-cap: market value below $300 million
While market cap is an important metric in investing, it's essential to understand that it's not always synonymous with valuation.
Valuation is a term with broader usage in the world of investing. It has a more comprehensive analysis of a stock’s fundamental attributes.
What makes the market cap go up? It's simple.
If the stock price moves higher or the number of outstanding shares increases, then the market cap increases as well.
You can filter specifically for high-quality mega-cap and large-cap stocks with the Stock Screener on InvestingPro.
Although market cap alone may not provide all the necessary information for purchasing stock in a company, it does offer valuable insights into the company's value, enabling you to categorize your investments, manage risks effectively, and facilitate the diversification of your portfolio.
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