Explanation of Market Capitalization
Market capitalization is a metric used by stock analysts and investors to gauge the worth and profit potential of stocks. Used alongside metrics such as earnings per share, dividend-payout ratio and debt-to-equity ratio, market capitalization can provide insight into individual stocks' strength compared with alternatives in the market. Similar to a number of other stock valuation metrics, market capitalization does not take fundamental measures of a company's financial performance into account, relying solely on stock information. Understanding market capitalization is crucial to becoming a well-rounded investor.
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Significance
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The main use of the market capitalization metric is to gauge the relative size of companies trading on stock exchanges. Calculating companies' market capitalization allows analysts and investors to classify companies according to the value of their outstanding stock, helping stock traders to narrow their options based on their personal preferences. As with other stock analysis tools, market capitalization gains deeper relevance when it is considered alongside other informative metrics. Investors choose companies with different market caps to achieve different objectives.
Calculation
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Calculating a company's market capitalization is a simple and straightforward process. First, visit a stock news website, such as Reuters or Bloomberg, and look up your company's ticker symbol. Locate the stock's current price and the number of shares outstanding in the market. Multiply the current stock price by the number of shares outstanding to arrive at the stock's market cap. You can check your chosen website to see whether the calculation has already been done for you.
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Types
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Stocks generally are classified as either small, mid or large cap, depending on their market capitalization figure. Small-cap stocks have a market capitalization between $300 million and $2 billion. Mid caps have a market capitalization between $2 billion and $10 billion, while large caps have a market cap between $10 billion and $200 billion. Additional categories exist to classify market cap outliers, including nano cap, micro cap and mega cap.
Considerations
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Market capitalization can be a less useful metric on its own than other valuations. Because market cap takes the number of shares outstanding into consideration, comparisons between companies with vastly different numbers of stock shares in the market can become skewed. Also, because the market relies on current stock prices, the exact market cap for individual stocks is likely to change frequently throughout each trading day. You should take these factors into account to gain deeper insight into the numbers.
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References
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