Understanding the Stock Market: Market Capitalization
Market capitalization, also referred to as a market cap, is a measurement of a company's financial size and is a valuable indicator of where a company sits in share price and risk investment. Investors use market capitalization to determine a company's financial capacity and perceived value in the stock market. For investors, understanding the value of a company before purchasing a stock is very important.
To help you understand market capitalization better, let's use Perry’s Pizza’s stock as an example to help you learn how to determine a company's market capitalization.
Perry's Pizza Stock
Disclaimer: Perry's Pizza is a fictional company traded on a fictional stock exchange.
Perry's Pizza is a publicly traded company with 1 million worth of outstanding shares. Perry's Pizza has a current stock price value of $75 per share.
How to determine a company's market capitalization:
Market capitalization = the number of outstanding shares x share price
When you research a publicly-traded company, their market capitalization is listed in their stock market summary.
When choosing a stock to purchase, it’s crucial to analyze the type of stock you plan to invest in and their market capitalization range. Investors divide and assess companies according to their market capitalization. Here’s how you can determine a company’s market capitalization range.
Mega-cap companies tend to be highly successful in their respective industry. People are more inclined to invest in mega-cap companies because of their proven success rate over a long period of time. Investors typically like mega-cap companies because of their consistent growth rate in share value and their dividend payouts. Examples of mega-cap companies include Amazon (NASDAQ: AMZN) and Microsoft (NASDAQ: MSFT).
Mid-cap companies typically are companies that are expected to excel quickly and are generally still expanding their business. Although mid-cap companies have a higher risk level, investors are more attracted to mid-cap companies because of their vast opportunities for growth, productivity, and expansion. Examples of mid-cap companies include Helen of Troy Limited (NASDAQ: HELE) and Eagle Materials (NYSE: EXP).
Small-cap companies are usually younger companies that are new to their respective industries or serve a specific audience. Small-cap companies are considered a more volatile investment due to the company’s age, size, and niche market. Examples of small-cap companies include Celsius Holdings (NASDAQ: CELH) and ACM Research (NASDAQ: ACMR).
Smaller companies with a market capitalization below $50 million are considered to be nano-cap companies.
What are some other terms or particulars about the stock market that you are interested in understanding better?