Nowadays that owning a business has become very popular we often hear people categorize companies and firms as small cap, mid cap or large cap. The part “cap” of the word stands for “capitalization” and. The whole word refers to a measure by which we can classify the size of the company. In other words, Market cap actually refers to the total dollar market value of a company’s outstanding shares.
How to calculate market cap
There is a simple way to calculate market capitalization. Simply take the total number of a company’s shares outstanding and multiply that figure by the stock’s market price. If a company has 2 million shares outstanding and each share is worth $20, then its market capitalization is $40 million.
Definition of market cap categories
Large-cap companies typically have a market capitalization of $10 billion or more. These are usually the companies that have been working for a long time. Investing in these enterprises can lead to a consistent increase in share value and dividend payments in the long run.
The market capitalization of Mid-cap companies is between 2 billion to 10 billion dollars. These countries have a great chance of becoming the market leaders.
Small caps are typically new or relatively young companies whose market cap is between $300 million to $2 billion. Small caps do present the possibility of greater capital appreciation – but at the cost of greater risk. The market caps bellow 2 billion are categorized as micro caps or nano caps.
Misconceptions about market cap
A large group of investors think the higher the stock price, the larger the company. However, this is just a misconception. Stock price in fact, may misrepresent a company’s actual worth. If we compared the two companies by solely looking at their stock prices, we would not be comparing their true values. The reason is true values are affected by the number of outstanding shares each company has.
So market cap is used often to describe a company, but it does not measure the equity value of a company. The only thing that can indicate the true value of a company is a detailed analysis of a company’s fundamentals. Therefore because this concept does not exactly show how much a business is worth, it would be inadequate to value a company based on market cap. Shares are often over- or undervalued by the market. This means the market price only indicates how much the market tends to pay for its shares.
It measures the cost of buying all of a company’s shares and not determine the amount the company would cost to acquire in a merger transaction. The way to calculating the price of a business outright is the enterprise value.