Market Cap Meaning: Introduction Of Market Capitalization, Market Cap Definition, Market Capitalization Formula, Classification Of Market Cap, Small Cap, Mid Cap, Large Cap, Example, Importance of Market Capitalization, Is It Better to Have a Large Market Capitalization, How To Calculate Market Cap, Summary
Market cap meaning and market cap definition are discussed below in very simple words. Market Cap stands for market capitalization.
There is very important to know your Market Cap Meaning if you are a stock investor. Market cap or market capitalization is a basic term in the stock market.
Here we will learn the importance of market cap and everything related to market cap like market cap definition, meaning, market capitalization formula etc.
If you are a stock investor so we hope you have an understanding of market capitalization.
It is very important to learn the first basic terminology of The Stock Market before investing your hard earn money in the stock market.
New investors often judge a company by its share price.
For example, each share of Company A is $100 and each share of Company B is $200, so new investors assume that Company B is good and large.
While maybe the market cap of company A is more than that of B and company A is bigger, next we will know how the market capitalization is determined.
Table of Contents
Market Cap Definition
What Is Market Cap? What Is Market Capitalization? What Is Market Cap? Defined and Explained. What does mean market cap? What is market cap and why does it matter?
The answer to all the above questions are below, read the paragraph very carefully.
Market Cap is a short structure of Market Capitalization.
In very simple words, ” The aggregate valuation of a company based on its current share price and the total outstanding shares of the company is called Market Capitalization. “
In simple terms market cap definition is :
” A company’s Market Cap is the multiplication of the current share price of the company with its total outstanding shares.”
The aggregate value of a company on which that whole company can be bought is also called market Cap.
A company’s Market Cap is the multiplication of the current share price of the company with its total outstanding shares.
Now the question comes to mind what are outstanding shares?
Outstanding shares are the stock that is held by a company’s individual shareholders, restricted shares that are held by a company’s officers and institutional investors along with the company’s open market shareholders.
It is also called the capital stock of the company.
Classification Of Market Cap
As per the company’s total valuation in the stock market, there are mainly three types of market capitalization.
- Small Cap
- Mid Cap
- Large Cap
Small Cap
Small Cap companies are young and their approximate valuation is $2 billion.
They are young companies so their high growth potential along with their stock may have the possibility of good return but they also have a chance of significant losses.
As the name suggests, A Small Cap refers to those companies whose market capitalization is low in comparison to Mid Cap.
Small Cap companies have a lot of growth potential as they are in the growing stage but in the investment, but they are risky investments as their future performance is unknown how well they perform in future prospects.
Mid Cap
Mid Cap Companies Market Valuation is approximately $2 billion to $10 billion. Mid Cap companies also have growth potential, Their stock has the potential for good returns but also may have a drastic loss.
A Mid Cap refers to those companies whose Market Capitalization is bigger than Small Cap companies and lower than Large Cap companies.
Mid Cap companies also have a growth potential but less than Small Cap normally.
In the investment view, Mid Cap companies are less risky than Small Cap and riskier than Large Cap companies.
Large Cap
The Valuation of Large Cap companies is $10 billion or more. Large Cap companies show rapid growth potential, Their stock has the potential to a consistently good return with a sense of security.
A Large Cap refers to those companies whose market capitalization is bigger than both Small Cap and Mid Cap companies.
Large Cap companies have less growth potential in comparison to Mid Cap or Small Cap.
In the investment view, Large Cap companies are not risky or we can say very less risky because they have the capital to survive in bad times.
Market Capitalization Formula
Market Cap = Current Market Price of Company Per Share * Total Number of Outstanding Shares of the Company.
Calculation Of Market Capitalization
Market Capitalization is calculated by multiplying the current market price of the company’s shares by the total outstanding shares of the company.
Let’s assume ABC Limited Company data is-
The current market price per share is = $100
Total Outstanding shares issued by the company = $500000
So, the Market Cap of ABC Limited is = $5 Crore.
How To Calculate Market Cap: Example
Let’s Assume the Data of two companies ABC Limited and XYZ Limited as follows –
| Company Name | Current Market Price of 1 share | Total Outstanding Shares | Market Cap = ( 1 share Current Market Price * Total outstanding shares ) |
| ABC Limited | $10 | 5 Crore | $50 Crore |
| XYZ Limited | $30 | 1 Crore | $30 Crore |
As the data state, the current market price of one share is more in XYZ Limited but the market capitalization is more in ABC Limited.
So if all factors are good in both companies then ABC Limited is Good for investment even if its 1 share current market price is $10 less than XYZ Limited’s 1 share current market price.
Importance Of Market Capitalization
Market Cap or Market Capitalization is one of the most important characteristics that help the investors determine the returns and risks in the scheme.
Market Cap allows investors to find the size of the company versus the company’s future prospects, risks and rewards.
Market Cap can use to measure the worth of the company as well as future growth, and the business of the company so whether investors invest in company shares or not.
According to the market capitalization, investors can invest in the stock of a company keeping in mind the growth, risk and future prospects of the stock.
Market Capitalization can work as an indicator in the stock market as investors can invest in stocks with Large Cap, Mid Cap or Small Cap.
We can use Market Capitalization to balance our Portfolios by picking some stocks from Small Cap, some from Mid Cap and others from Large Cap.
Is It Better To Have A Large Market Capitalization
Small Cap stocks come with high return rewards along with high risk because no one knows about the future performance of Small Cap stocks.
On the other hand, Mid Cap stocks come with less high return rewards and less risk than Small Cap stocks.
Large Cap stocks come with good returns rewards along with very low risk.
They are a well-established company, shows rapid slow growth and always have a good chance to increase the asset value in long-term investment.
Large market cap companies have a consistent growth summary in their past, Investor can believe these companies because companies have sufficient reserve funds if any legal, marketing or other type issues comes along with these companies having expert management to solve all types of issue.
So from my point of view, Market Capitalization is working as an indicator and helps to select stocks to make a portfolio balance with always is better to have a large market capitalization for investment.
Summary
Market cap meaning, market cap definition, market cap importance and calculation play a significant role in the stock market for investors.
On one way it can use as an indicator to balance a portfolio and on another hand, it shows the risk and rewards of investment.
It helps investors balance their portfolio according to market capitalization, risk-bearing capacity and targeted reward.
So Large market Capitalization companies are better for a long-term investment with minimum risk and Small Cap Market Capitalization companies are better for high returns with high risk.
FAQ
Q : What is Market Cap and Why does it matter?
Ans : Market cap refers to the company’s total valuation and is the product of the current value of a share with the company’s total outstanding shares. Market cap analysis is important for the investor as investors invest in a company keeping in mind the risk, growth and future prospects and market cap acts as a link in understanding the company’s size and business risk.
Q : What does Market Cap mean in stocks?
Ans : In the Stock Market Company market Cap is categorized under Large Cap, Mid Cap & Small Cap. All these Market Cap companies have different growth potentials, risks and futures of the company. So Market Cap defines the growth potential, risk and future prospects of the company.
Q : Does a Large Market Capitalization Indicate a Better Company?
Ans : Yes, Large market capitalization is a factor that indicates a better company because Large Cap companies are less risky than Mid Cap or Small Cap.
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