Market cap
The market cap , in Dutch market capitalization , represents the total value of all outstanding shares of a company together. It is a relevant figure for investors who are busy drawing up an investment strategy. In addition, it is often used as a gauge with regard to the size of a company.
The calculation
Calculating the market cap is not very difficult. You multiply the number of outstanding shares by the current price per share.
Market cap = outstanding shares * price per share
What influences market cap?
It is important to understand that the above formula is influenced by two factors. On the one hand, it concerns the number of shares outstanding and on the other hand, it concerns the individual price of these shares. This does not mean that a higher share price equals a larger company. After all, a company that only has 10 shares outstanding at 100 euros each is smaller than a company that has 10 million shares outstanding at 10 euros each. This is where you immediately find the relevance of the market cap. Without knowing the market capitalization, you can hardly judge the size of a company.
Before a company goes public , the market capitalization is calculated by a number of large banks. These large banks determine how many shares are issued and they give a price per share. The market capitalization is then static. However, this is different from the moment of the IPO. Because share prices fluctuate on the stock exchange, the market cap also changes continuously. After all, share prices depend on supply and demand. It also happens regularly that changes are made to the number of outstanding shares. Logically, this also affects the market capitalization. It can be said about the split of shares that this will not have a direct effect on the market cap. The number of issued shares is doubled, but the price is halved. The ratio therefore remains the same.
Market cap categories
In the investment world, the market cap is often classified into a category. There are basically 3 categories, which you can find below.
1. Large-cap to mega-cap
Large-cap companies are classified as companies with a market capitalization of at least 10 billion dollars. Some stock market gurus advocate the existence of a category above large-cap, namely mega-cap. This concerns companies with a market cap of over 200 billion dollars. These are therefore the seriously big boys. Both large-cap and mega-cap companies can be described as seasoned and stable. You will find less volatility in such companies , because they have sufficient capital to absorb setbacks. It therefore hardly needs any explanation that investing in large-cap and mega-cap companies is less risky than investing in companies with a lower market cap. When such companies grow, this is often slow and steady while maintaining dividends. Because large-cap and mega-cap companies are somewhat larger, they will grow less quickly than a small and trending company. Such companies are therefore ideal for investors who are looking for a stable (dividend) share . If you are looking for growth stocks, mid-cap and small-cap companies may be more interesting.
2. Mid-cap
If you want to be classified as a mid-cap company, you need to have a market cap between 2 billion and 10 billion dollars. It is actually the ideal middle ground between large-cap and small-cap. After all, companies that have achieved a market capitalization of at least 2 billion dollars have proven themselves. In addition, there is still plenty of room for growth. However, mid-cap stocks will be more volatile than large-cap stocks. Mid-cap companies are ideal for investors who are looking for a stock with growth potential and some stability.
3. Small-cap, micro-cap en nano-cap
Small-cap stocks have a market capitalization of at least $300 million and a maximum of $2 billion. Micro-cap companies are between $50 million and $300 million, while nano-cap companies are below $50 million. The biggest advantage of such companies is their growth potential. There is a lot of potential for further growth, even though the prices will not always be stable. Ideal for the investor who is looking for a slightly more aggressive strategy with maximum potential.
The importance of market cap
Knowing the market cap of companies you invest in provides a bit of awareness. When you are designing or adjusting your investment strategy, market capitalization is of above-average importance. If you opt for a relatively aggressive strategy, you will have to focus more on small-cap companies. If you are going for stability and dividend, you will have to look at large-cap companies.
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