Does a “market cap” sound like fashion wear to you? If so, then make sure you read this post to the very end!
Market capitalization or “Market cap” refers to the total market value of all the publicly traded shares of that company. Basically you take the number of shares available for a company, multiply by the stock price and that gives you the market capitalization. For example if a company has 5,000 outstanding shares that are worth $40 each – the total value of the shares of $200,000 which is also the market capitalization.
It’s important to note that market capitalization doesn’t necessarily have anything to do with the actual value of the company assets – but rather the value of ownership which includes all the assets of the company plus any future expectations of profits.
It’s possible to have a company that doesn’t own any assets but has a great idea for making money – investors might value this company highly. Google is a good example of a company that has a market cap far higher than its assets because its investors are assuming the company will be able to increase its profits at a rapid pace.
Small cap vs Large cap
The capitalization of a company is most often used when grouping companies by size. A mutual fund or ETF might specialize in large cap companies or small cap companies. The general thought is that smaller companies (measured by market cap) are riskier investments but might perform better over the long term. Larger companies are not as risky but also might not go up in value as much as the smaller cap companies.