What is market cap?

Welcome to my “What is market cap?”

Market Capitalization, the total market value of all issued shares of the company. Market capitalization is calculated by multiplying the number of shares of a company in circulation and by the market price of one share. In the investment industry, this indicator is used to determine the size of the company and is an alternative to indicators such as revenue and asset size.https://www.blogger.com

For example, if there are 55 million shares in circulation and the market price is $ 80, the market capitalization of the company will be $ 4.4 billion ($ 55,000,00080).

The size of the company is the main indicator for deciding on the placement of the investor's assets and for determining the risk/income parameter, when buying a company's shares directly, or when investing in an investment fund. Do not confuse this term with the "capitalization" of the company, which is the term of financial reporting, and represents the amount of shareholders' equity of the company plus long-term liabilities.

Shares of large, medium and small companies are referred to as shares with large, medium and small capitalization. Investment professionals differ in their precise definitions, but at the moment there are the following categories of market capitalization:

large capitalization: over $ 10 billion (the largest companies on the market);

average capitalization: from $ 2 to $ 10 billion;

small capitalization: less than $ 2 billion.

1. In accounting, this means a situation where the cost of acquiring an asset is included in the price of the asset. For example, if the machine is purchased for $ 50,000, this value will be reflected in the assets of the company. If the cost of delivery is $ 2000, these costs will be capitalized and included in the assets.

2. The number of shares of the corporation, long-term debts, and retained earnings. Sometimes this amount is called "invested capital". The capitalization of the company may be excessively large or insufficient; both these options are potentially negative.

3. Issued shares of the company multiplied by the stock price. The term is better known as "market capitalization". If the company has 100,000 shares in circulation and the market rate is $ 5 per share, then its market capitalization is $ 500,000.

Average capitalization - English. Middle Capitalization, a company with a bazaar capitalization of $ 2 to $ 10 billion, which is calculated by multiplying the number of shares of the company in circulation for the stock price. The term "Mid Cap" is a reduction from "Middle Capitalization" (average capitalization).

As you can understand from the name, the mid-cap company is in the middle of large capitalization and small-cap companies.

It should be noted that such classifications (large capitalization, average capitalization and small capitalization) are approximate and can change with time. In addition, the exact definition of these terms may differ for different participants of the investment business.

Small capitalization - English. Small Cap, the term refers to shares of companies with relatively small market capitalization. The criterion, according to which the company is considered with a small capitalization, can differ significantly among different brokers. Usually, these are companies with a market capitalization of $ 300 million to $ 2 billion.

One of the biggest advantages of investing in shares of small-cap companies is the ability to bypass institutional investors. Since investment funds have restrictions that prohibit them from buying a large package of issued shares of any issuer, some investment funds simply are not in a position to maintain a significant share of the shares of small-cap companies in their portfolio. To circumvent these restrictions, the fund must register such transactions with the Securities and Exchange Commission (SEC), which means disclosing their intentions, which may result in inflation of an earlier attractive share price.

Keep in mind that the classification of the type of "big capitalization" or "small capitalization" is sufficiently conditional, and kritioi can change over time. In addition, the exact definition may differ in different brokerage firms.

Market capitalization is a metric used to estimate the value of all issued common shares to determine the relative size of a business. It differs from the value of the company (enterprise value) and does not take into account the issued bonds, debts and other securities of the firm.

Market capitalization is a very important indicator, used daily on stock exchanges. Although you can hear this expression every day in the various economic news, few investors understand how this value is calculated. But, in fact, there is nothing complicated here.

If it's easy, then this is the amount of money you would need to buy out all of the company's common shares at the current market price. For example, Coca-Cola released at the time of writing article 4.358.700.821 shares, and the price is $ 39.47. If we wanted to buy all the shares of Coca-Cola, then we would need 172 billion dollars (4.358.700.821 * 39.47). It is this figure that is called the market capitalization of the company.

Why is market capitalization such an important concept? It allows investors to understand the relative size of the company in comparison with other firms. For example, shares of AutoZone (a major supplier of auto parts) cost $ 671, which is much larger than the value of Coca-Cola shares ($ 39), but the market capitalization of the company is $ 20 billion, which is only 11% of the similar value of the soda producer (172 billion).

When using this indicator when choosing companies for investment, it is worth considering some of the disadvantages of this metric. Market capitalization does not take into account the company's debts. In other words, in addition to the $ 172 billion capitalizations, Coca-Cola can have debts of several tens of billions of dollars. That is, to understand the true value of the company, you need to add market capitalization and all debts. The resulting value usually means the value of the company (Enterprise Value).

In fact, there are several other factors that are taken into account when calculating the company's value, but we'll talk about them another time.

Many professional investors share their portfolio on the basis of market capitalization indicators. This approach, as many believe, allows taking into account the fact that small companies grow historically faster and develop than large firms and corporations. However, large companies are more stable and pay more dividends.

Think about the fact that all companies, regardless of their size, operate in the same economic conditions. Therefore, small firms are more difficult to survive the various financial crises in the country or the world, and if the general weakening of the economy drags out, then some firms may not survive at all.