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Market Capitalization - What is it and Why does it Matter?
Your 2-Minute dose of Genius!
Sika Republic
November 07, 2023
As a new investor, you may have come across the term "market capitalization" and wondered what it means and why it matters. In today’s 2-Minute Masters, we’ll explain what market capitalization is, how it's calculated and why it matters.
Simply put, market capitalization “market cap” is the total value of all the outstanding shares of a publicly traded company. It is calculated by multiplying a company's current stock price by its total number of outstanding shares. So, if a company has 100 million shares outstanding and its stock is trading at $50 per share, its market capitalization would be $5 billion (100 million x $50).
Large, Mid, Small-Cap
Market capitalization is often divided up into three categories: large-cap, mid-cap, and small-cap. Companies with a market capitalization of $10 billion or more are considered large-cap, those with a market capitalization between $2 billion and $10 billion are mid-cap, and companies with a market capitalization under $2 billion are small-cap.
Why does it Matter?
Understanding a company’s market capitalization can give you a general idea of how big a company is, its stability and growth potential, as well as how much value investors are placing on it.
Large-cap companies tend to be more stable and less volatile than small-cap companies. They often pay dividends and have a long track record of profitability. However, they may have less room for growth than mid-cap or small-cap companies.
Small-cap companies may offer more potential for growth but could also be riskier and more volatile. Mid-cap companies offer a balance between stability and growth potential but can still be exposed to market volatility.
Another reason why market capitalization matters is that it can help you diversify your portfolio. By investing in a mix of large-cap, mid-cap, and small-cap companies, you can spread your risk across different market segments.
Having an understanding of market capitalization is important, but it’s not the only factor that you should consider when investing. Other factors like the company's financials, earnings growth, management, and the future of the industry are just as important.
Today’s Takeaway:
Market capitalization is an important metric to be aware of when investing, and as a new investor, it is important to understand how to use it to evaluate companies and diversify your portfolio. So, next time you hear the term "market capitalization," you’ll confidently know what it means and why it matters.