What Is Market Capitalization Of A Company?

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Video Transcription:

Hello, traders. Welcome to the Stock Trading Course and the first module, Introduction to Stocks. On this lesson I’m going to talk about the market capitalization of a publicly traded company. And for abbreviation purposes, we are going to call it the market cap of a company. So what is the market cap? The market cap of a company is the total dollar market value of all of a company’s outstanding shares. It’s as simple as that. There is a simple way of calculating the market cap of a company by using this formula: market cap = the number of outstanding shares times the share value at that time.

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So for example, if a company has 40 million outstanding shares with a market value of $98.52 per share, the company’s market capitalization would $3,940,800,000. So the big question is why is it important to know a company’s market cap. The market cap allows you to see the company size, or how much a company is worth at the current market price. And the company size is a base determinant of risk reward parameters when it comes to analyzing an investment. It’s as simple as that. When you look at investing in a company, the first thing you’re going to look at is the market cap or the company’s size. The bigger the market cap, the safer the investment in theory. Listed companies are grouped by market cap. We have large cap companies, we have mid cap companies, and we have small cap companies.

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Let’s talk about small cap companies for a moment. These are the companies that have a market cap under 2 billion dollars. Small cap companies are not penny stocks companies all the time. But because they are less followed and traded, they are less liquid than mid and large companies. And because of their iliquidity, small caps are very volatile and can be very risky to trade. And not only that, also, small cap companies can have huge potential to the outside, but they’re also very risky because of their small market capitalization and their risk of foreclosure.

Mid cap companies, these are the companies that have a market capitalization between 2 and 10 billion dollars. Some of the time, mid cap companies are former large caps that have gone through a rough patch and have seen a strong decrease in value. But when it comes to new mid cap companies, they have enormous growth opportunities, because once they achieved the status themselves. And basically this is why it’s important to know about a company or a company’s market cap and what a market cap is, before even trying to start trading stocks.

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