How to use market capitalization to determine where to invest
To determine market capitalization or a market cap you take a company's outstanding stock shares and multiply them by the price of one share. For example, if a company has 1 million outstanding shares and the price per share is $50, then the market cap would be 50 million dollars. There are six different levels of market capitalization. These are:
- Mega Cap. This describes companies that have a market cap of $200 billion dollars or more. Some of these companies are Wal-Mart, Microsoft, and Exxon.
- Big or Large Cap. This means the market capitalization in between $10 billion and $200 billion. Just as an idea, companies in this range are IBM and Yahoo. Mega and Large capitalization are often referred to as "blue chips".
- Mid Cap. This means the market capitalization value is between $2 and $10 billion dollars.
- Small Cap. These have a market capitalization range from $300 million to $2 billion.
- Micro Cap. This describes $50 million to $300 million worth of market capitalization.
- Nano Cap. Market caps $50 million and under
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It is important to look at the different categories of market capitalization because it also helps investors to know how much risk may be involved in their investments. The higher the cap, the less risk there is with your money. When investing in Nano through Small Cap, the more research you do on the companies, the better. They are going to be high risk and unless you know what you are getting yourself into, you need to be prepared if your stocks fall.
Market capitalization is basically stating how much the public thinks the company is worth. It is extremely important to look at when determining where to invest. Even though a company might have high stock and share prices, that doesn't mean that it is the bigger company.
Example: If company A has share prices set at $50 per share and company B has there's set at $100, at first glance it looks as though company B is the bigger company. However, company A has 5 million outstanding shares while company B has 1 million. This means that company A has a market capitalization of 250 million dollars while company B only has 100 million dollars. So, company A is actually the bigger company.
This example shows why it is so important for investors to look at the market capitalization. There is more to stocks then the prices and investors need to look at all of the surrounding circumstances.
Any investment is risky. Investing in the stock market can be very confusing and overwhelming at times. There are key things to keep in mind and to look for when determining which companies to invest in, and market capitalization is definitely one of those things. It is up to you as the investor to gain as much knowledge as possible about the company that you want to invest in. What the public values the company at should be a huge factor in whether you want to invest in it or not.
Market caps are one of the most important factors of reading the stock market and it actually happens to be one of the easiest calculations to figure out. Just don't forget to do it. It's easy to look at the numbers of the price per share because they are right in front of you. Sometimes, this number will reflect good companies, but sometimes they won't. It will be up to you as the investor to figure these out. Prices of shares and numbers of outstanding shares change daily, so be sure to do your research and take your time when deciding which companies to invest in.
