The Importance of Knowing a Company’s Market Cap Before Investing in It

An investor will measure a company’s performance based on its sales, but he should be aware of its size in terms of the market value. By knowing the market capitalization of a company he can diversify his stock portfolio among different asset classes. Because market cap not only measures the company’s value in the open market, but also give insight into its future performance. So market cap plays a major role in deciding the future and prospects of a company.

 

We can calculate market capitalization by multiplying the per share price of a company with its total number of outstanding shares. This number will give you the total value of the company, or help us to know how much it cost to buy the company in the open market. Most of the investors use market cap to compare the performance of similar sized companies or companies dealing with the same business before making an investment decision. If the per share price of a company is $50 and its total outstanding shares is 100 million, then its market cap will be $5 billion. And when a similar sized company’s per each share cost is $10 and its total outstanding shares is 400 million, and then its market cap will be $4 billion. If we evaluate these two companies, the second company’s market capitalization is higher than the first one and this gives the investor a clear picture about the company’s growth rate, risk, dividends and international exposure. So there can be companies with lower sales but tremendous growth opportunities. Such type of companies will have large market caps and they will become one of the investors’ favorite.

 

Based on the market capitalization companies are categorized into three types. They are small cap, medium cap and large cap.

 

Small cap companies – The companies belonging to this category will usually have a market cap between $150 million to $1 billion. Belonging to small cap category, these companies per share price will be small or total outstanding shares will be relatively small. So they are considered as relative less risky stocks. Some analysts often consider these stocks as good investments due to their low valuation and possibility to grow to a mid cap or large cap stock. If we invest wisely in such type of stocks, which is by making a technical and micro analysis about the company, then we can anticipate good returns. If you can track the hidden gems in the small cap space then it’s a good idea to invest in such stocks, as nothing else can appeal you more.

 

Mid cap companies – The companies that have market capitalization in the range of $1 billion to $10 billion will come under the mid cap category. These companies are considered to have achieved a relative stability in the market and they got ample growth opportunities to come under the large cap category.

 

Large cap stocks – The companies that belong to large cap will have market capitalization above $10 billion. The big boys that come under this category are considered as the safest companies with regular dividend payouts. This category includes many blue-chip companies, oil giants, telecom companies and consumer product kingpins. In the U.S, some companies like AT&T, Johnson & Johnson, P&G and Wal-Mart are perpetual favorites among many investors. If you are ready to play without fear, then increase your stock portfolio with large cap stocks and enjoy great returns.

 

As a good investor, we should always update our information about the companies in which we are planning to invest or already invested. To gather news we always depend on daily newspapers, other than home television and internet. To become a smart and intelligent investor, one should assess the market capitalization of the companies he is going to invest; though understanding the present market conditions is also a key factor in deciding a company’s performance.

 

Read also: Become an Insider and Reduce Risk in Penny Stock Trading

Advertisements