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What is Market Capitalization ?
The market capitalization of a stock
is the market value of all the outstanding shares. It is often
abbreviated as “market cap” and is calculated by multiplying the
current price per share by the number of outstanding shares. For
example: If Ranbaxy was trading at $30 per share and had 2
million shares outstanding, then the market capitalization would
be $60 million ($30 * 2 million shares). In other words it is a
measure of a company’s total value. This measure is different
from the equity value to the extent that a company has
outstanding stock options or other securities convertible to
common shares. The company’s success or failure is dependent on
the size and growth of market capitalization.
Types of capitalization
There are Different types of Capitalization
• Mega cap
• Mid cap
• Small cap
• Nano cap
• Big/large cap
• Micro cap
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Mega cap:
This group of capitalization includes companies that have market
cap of about $200 billion or greater than that. These are
largest public traded companies such as GE (General Electric),
Microsoft, Exxon etc.
Mid cap: This group includes
companies that have market cap ranging from $2 billion to $ 10
billion. These groups of companies are considered to be more
flexible compared to large and mega-cap companies and might not
be industry leaders but are yet to become one. Growth stock is
an important factor of the mid caps. Growth stock is nothing but
the shares in a company whose earnings are expected to grow at
an above average rate relative to the market.
Small cap:
These groups include companies whose market cap ranges between $
300 million to $ 2 billion. These companies are new or
relatively small companies. These companies do not have track
records as lengthy as mid or mega caps but present the
possibility of greater capital appreciation at a cost of greater
risk. |
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Nano cap:
These groups include companies that have market caps below $50
million. The potential for gain in such companies are small and
these companies often trade on the pink sheets or OTCBB.
Big/large cap: These groups
include companies that have market caps ranging between $10 to $
200 billion. Most of the well known companies such as IBM,
Yahoo, citigroup etc fall under this category. These stocks are
supposed to be stable and secure. The large cap stocks and mega
stocks are referred as blue chips.
Micro cap: These groups
include companies that have market cap in the range between $50
million to $300 million. These mainly consist of penny stocks
and the upward potential of the companies that fall under this
category is similar to the downside potential. Proper enquiry is
required before investing in such companies since it is not
safer.
Importance of Market Capitalization
Market capitalization helps in understanding the company’s
growth or failure. It is not that the companies with higher
stock prices are larger. The classification of the companies
that are done based on different caps helps the investors to
measure the growth of the company versus risk potential. It is
seen that large caps have experienced slower growth with lower
risk where as small caps have experienced higher growth
potential with higher risks.
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Stock price does not represent a
company’s actual worth. For example: if we take two companies
such as Microsoft and General electric, we can see that at the
time of writing their stock prices the values are $30 and $27.25
respectively. Although we see that Microsoft stock price is
higher, it has about 1.8 billion shares outstanding, while
General Electric has 11.23 billion shares outstanding. With this
difference we can see that General Electric market cap is
actually greater than Microsoft. When we look or compare the
company’s stock price we are actually not comparing their true
values, since they are affected by the amount of their
outstanding shares.
Terms used in Market Capitalization
There are certain terms that are used in market capitalization
that includes:
• Valuation.
• Float.
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Valuation:
Market capitalization does not indicate the intrinsic value of the
company but is a function of a company’s stock since the future
expectations held by the investors keeps varying. For example in
early nineties internet related companies were valued high in the
market and small companies did not have any sales. But know those
small companies have generated market capitalization in billions of
dollars. Since the market prices tend to increase at a high rate
than earnings accumulate it is common for a company’s market
capitalization to exceed book value. Book value of an asset or group
of assets represents the price at which they were originally
acquired. in many cases it is equal to the purchase price.
Float: Float can be defined as
the amount of shares that are available on the open market. In other
words it is an estimate of proportion of shares that are not held by
large owners and that are not stock with sales restrictions. The
free float is sometimes less than the total number of shares since
some portion of the outstanding shares may be held by the insiders
or by the company itself as treasury stock. Insiders refer to a
group of people with access to restricted knowledge or resources.
Treasury stock, which is also called as reacquired stock often
refers to stock that, is bought back by the issuing company.
Even after the float being small compared to the total number of
shares, some portion of the float may be owned by large
institutional investors who rarely trade. Due to this, on any given
trading day, only a small percentage of shares are traded.
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Article Contributed By: Jaya Suresh
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