Market Capitalization Meaning, Definition And its Importance
What Market Capitalization Is and Some Examples
The value of a company’s shares of stock is its market capitalization. It’s used to compare the sizes of companies, which helps investors figure out how much risk and return they can take.
Find out what “market cap” means, how it works, and how you can use it to help you decide how to invest.
What is the size of the market?
Simply put, the stock market capitalization is how much it would cost to buy all of a company’s shares of stock at the current market price. This metric can be used to compare the sizes of different companies.
There are also benefits and risks to investing in companies of different sizes. Investors may want to focus on specific company sizes, like large-cap companies, best stocks to buy today or diversify by having small-, mid-, and large-cap companies in their portfolios.
How the Market Value works
Market capitalization is the total value of all shares that are for sale on the market. It doesn’t count shares that can’t be sold, like the ones that company executives hold. It changes based on how much shares are worth. If the value of a company’s shares goes down, the market cap will go down. As warrants increase the number of shares that can be bought, exercising them can also change the market cap. A warrant lets you buy a certain number of shares in the future at a specific price.
Investors usually choose stocks based on how risky they could be and how much they could grow. How much a company can grow and how likely it is to fail depends partly on its size. In general, small businesses have more growth potential but also carry more risk because they haven’t been around for long. Even if the economy takes a nosedive, it’s unlikely that a big company will fail. This is because big companies don’t increase.
Most of the time, dividends and stock splits don’t change the market capitalization.
How to Figure Out the Size of the Stock Market
Capitalization of the stock market is easy to figure out. You only need to know how many shares are out there and how much they are worth right now. Here’s how it works:
Market capitalization is equal to the number of shares in circulation times the current price of a share on the market.
On December 31, 2021, there were about 4.34 billion shares of stock in The Coca-Cola Company, and each share was worth $59.21. If you wanted to buy every share of Coca-Cola stock in the world, it would cost you $59.21 times 4,340,000,000 shares, or $256,971,400,000. That’s more than $256 billion. At the end of 2021, people on Wall Street would say that Coca-market Cola’s capitalization was about $256 billion.
The Good Things About Investing Using Market Cap
Stock prices can sometimes lead you astray when comparing one company to another. On the other hand, stock market capitalization doesn’t take into account details about a company’s capital structure that can make one company’s share price higher than that of another. This lets investors know how big each company is compared to the other.
For example, compare Coca-Cola, which costs $59.21 per share, to Netflix, which costs $602.44 per share as of the end of business on December 31, 2021. Even though the second company’s share price is much higher, its stock market capitalization is about the same as Coke’s at about $267 billion.
The Risks of Investing Based on Market Cap
The capitalization of the stock market can only tell you so much. The biggest problem with this metric is that it doesn’t consider how much debt a company has.
For example, the company had about $20 billion in current liabilities as of December 2021. (debt, taxes, etc.).
If you bought the whole business, you would have to pay for and take care of all those obligations. Coke’s value on the stock market was $256 billion, but its value as a business was $282.9 billion. If everything else were the same, you would need the second number to buy all the common stock and pay off all the company’s debts. Enterprise value is a better way to determine how much a company is worth buying.
Another big problem with using stock market capitalization as a proxy for a company’s performance is that it doesn’t take into account distributions like spin-offs, how does stockx works, split-offs, or dividends, which are very important when figuring out a concept called “total return.”
An investor can still make money based on the total return even if the company goes bankrupt. This seems strange to many new investors. One thing is that you may have gotten dividends over time. The company could also be bought out, and your shares could be bought outright or moved to shares in the new parent company.
Putting together a portfolio with a market capitalization
Many professional investors divide their portfolios by the company’s market capitalization size. These investors do this because they think it lets them take advantage of the fact that smaller companies have grown faster in the past, but larger companies are more stable and pay more in dividends.
Here is a list of the different market capitalization categories you might hear about when you start investing.
Small cap: A company with a stock market capitalization of $300 million to $3 billion is called a “small cap.” These are companies that aren’t too old, but they may increase. They are also more likely to be hurt by competition and the economy.
Mid-cap: A company whose stock market value is between $3 billion and $10 billion is called a “mid-cap.” People think these companies are riskier than small-cap companies but less risky than large-cap companies.
Large-cap: A company with a stock market capitalization of $10 billion or more is called a “large cap.” These companies have been around for a long time and may pay regular dividends. Their prices are also unlikely to change a lot.
- Market capitalization is the value of all the stock shares in a company.
- To find the market capitalization, multiply the number of shares in circulation by the price of a share on the stock market right now.
- Market capitalization can give you an idea of how risky it is to invest in a company and how much it could grow.
- It leaves out important things like how much debt a company has.