Numbers are very important in the world of business, and a proper understanding of values is paramount to any investor planning to have a successful financial portfolio. The stock price cannot determine the company’s value. Is it possible for numbers to lie! No, unless one does not know the calculation behind it. Consider the stock price of two companies, $15 and $30, the market cap of the second is not double the first one. This will depend on the outstanding shares of the company.
Market cap is equal value of the stock times the outstanding shares, that is the only relation between market cap and stock price. The market cap gives a good estimate of the net worth of a company. If the outstanding shares of the first company were 20 million, the market cap would be: $15x 20 000 000=$300 000 000 . Assuming too that the second has 5 million shares, it would be: $30 x 5 000 000=$150 000 000.The market cap shows us that the value stocks is irrelevant, that ultimately the outstanding shares is the determinant factor. Investors take into consideration the market cap in evaluating different companies before investing in them.
Is the market cap significant? Yes, its also one of a few ways to determine the size of a company. There are many investors and each has a specific number of shares but their share per price is not relevant in comparison with other stocks. market cap is value of outstanding shares of a company. Most new investors regard it the wrong way that if the price of the stock is higher than it means the company is doing well. It is not true that the price of stock represents a company’s net worth. When companies are classified in different caps investors can gauge growth versus potential risk.
Types of Capitalization
There are various market caps and different standards for capitalization as follows,
• Mega caps, these are companies with market caps of 200 billion
• Large caps, companies with market caps of 10 billion to $200
• Mid caps, companies here range from 2 billion to 10.
• Small caps, younger companies from 300 million to 2 billion.
• Micro caps, upward mobility of such companies is minimal, they don’t offer a safer
Investment patch for investor’s money.These ranges between 50 to 300 million.
• Nano caps, they range of 50 million and below. These companies are very risky and
Potential level is minimal.
For the investor understanding market capitalization is important.Investors of mutual funds are also encouraged to understand market cap.The investor who focuses on per share price ends up making unwise calculation based on facial value of a company and ends up buying expensive shares which do not yield the expected returns nor reflect the true value and worth of a companys stock worth.To get the true value you need to focus on the market cap to realize true earnings.