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

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Reasons To Own Small Cap Value

If you want to earn the best returns on your stock portfolio, you need to own small capitalization (less than 2 billion), value oriented stocks. Here are the reasons by our experts at Paradigm Capital Management:

 

1) They Outperform Every Other Class of Stock. Period.

 

Ibbotson Associates analyzed data from 1926 to 1997 and concluded that small cap value stocks outperformed the general market by 4.3% annually – more than any other class of stocks. Vanguard published data that showed, from 1927-2004, small cap value outperformed large cap value, blended, and growth portfolios. A Fama and French study shows this class outperforms all others in recessionary periods as well. Another study by Fund Evaluation Group shows that small cap value has outperformed every other group, and by a wide margin.

If we want the best returns for our portfolios, we have to invest in the best performing class of stocks.

 

2) The Market’s Valuation of Small Cap Stocks Is Inefficient

 

Stock analysts overwhelmingly cover large, well known companies. Their clients prefer to be in stocks of companies they know, and the investment firms they work for are forced to purchase large cap stocks so as not to exceed statutes by owning too much of a firm. When funds are operating with billions of dollars of assets, it doesn’t make sense to invest in small companies – any investment returns from these will not materially affect the fund’s performance because the position is too small.

 

One of the best books ever written on investing, Peter Lynch’s One Up On Wall Street, explains this phenomena well. Lynch earned stellar returns running Fidelity’s Magellan fund by buying hundreds upon hundreds of small positions in promising small cap stocks and holding them until the market realized their value.

 

Small cap stocks are valued inefficiently because of the lack of research on them, leading to misunderstanding of a company’s business or prospects. Add to this the general investment community’s unwillingness to invest in small caps, and you have a perfectly inefficient market for them, leading to bargains.

If we want the best returns for our portfolios, we have to take advantage of inefficiencies in the system.

 

3) Small Caps Can Become Big Caps

 

This one is obvious – you’re not going to find the next Microsoft or Wal-Mart by investing in Microsoft and Wal-Mart. When Microsoft started trading on the NASDAQ in 1986, it’s market capitalization was about 700 million. Today, it’s worth 260 billion – giving you back your initial investment 370 times over (and that’s not including dividends!).

 

Relating to point #2, once small cap stocks grow to a certain size, institutions and mutual funds can safely invest in them without worrying about statutory regulations or problems of scale. This leads to an influx of institutional money, sending stock prices up even farther. As market cap grows, these stocks get added to various indexes, which leads to investment by index funds that track them.

 

Small caps by their very nature have more and larger avenues of growth than large capitalization stocks. This, plus the intricacies of the financial markets, give them several advantageous characteristics for share price appreciation.

 

If we want the best returns for our portfolios, we need to own the best opportunities for revenue and earnings growth.

 

4) Small Caps Are Attractive Buyout Bait

 

Large companies are always struggling to deliver growth to their shareholders. Adding meaningful growth to a company with billions of dollars in revenues and earnings is not easily done. These large companies are often bureaucratic nightmares, slow to adapt with new trends and not nimble enough to stay ahead of changing markets.

 

Instead of taking the time, patience, and effort to develop new businesses, these cash rich mega-corporations often turn to acquisition as a quick fix for growth. Also, private equity groups will often buy these companies to restructure and then take them public again, reaping a big windfall. Buying small companies, even at a significant premium to market price, is often a drop in the bucket that delivers new opportunities in an instant.

 

5) Warren Buffett Says So

 

No less an authority than Warren Buffett himself has guaranteed that he could earn 50% annual returns investing sums of around 1 million. How would he do this?

 

“…look for small securities in your area of competence where you can understand the business”

 

If we want the best returns for our portfolios, we’d be wise to listen to the world’s greatest investor!

 

If you need any help then consult with the experts at Paradigm Capital Management – a trusted small cap investing company. We at Paradigm Capital are focused on a single minded purpose: To ensure that our clients have the best information on which to base intelligent financial decisions in pursuit of superior investment performance.

For more details, visit here: http://www.paradigmcapital.com/

Why Mid Cap Funds Are For You?

The market cap of a fund helps an investor know the size of the company he could potentially invest in. These cap sizes tend to vary over time. They also vary depending on brokerage houses. Generally, a small cap fund falls into the range of less than one billion dollars, a mid cap fund falls between one billion and eight billion dollars and the large cap funds are all above eight billion dollars. Large fund tend to have ownership level restrictions, and are best for long-term investors who aren’t looking for much risk. Small cap funds though, invest in companies that may not be all that stable – as they are still likely in the early stages of their business and could possible collapse. This is why small one are highly volatile to invest in, though they can give large returns. You need to be on your toes and know what you’re doing to get the best here.

 

A mid cap fund falls somewhere in-between these two funds. The companies in this range are slightly more stable than small cap funds. It doesn’t always end up moving with the market and its ups and downs – so there happens to be more stability here. This means that you need to fear a little less about their volatility.

 

It gives you more returns than other as well – and it’s not quite so long-term. So you get better returns than the large caps and better stability than with the small caps when you pick a mid cap fund. Over a period of time a small and mid one is likely to outperform a large cap fund. This is because a small and mid cap fund are more likely to focus on their growth strategy than already large conglomerates. They are more dynamic in their business as they are more compact.

 

But don’t depend on every single fund which is doing well – there are always exceptions to the rule. Look at your own finances and understand where you can afford to use your money. If you are more interested in long run investments, perhaps it isn’t for you. But if you want a higher return with less volatility you could consider investing in it. Remember to do your homework though, before you actually invest in mutual funds. You need to know where your money is going and what are the risks involved in a particular investment when you choose to invest. This fund value invested in midsized companies which would give you higher returns. Generally people invest in this fund because it offers vast growth opportunities as compared to other sectors.

 

Small companies often offered more growth as compared to big companies. So, we should invest in fund which can invest in small, large and mid size companies

 

So, before investing in it research the market, analyze it which helps you to get what you think about the return amount.

 

If you want to learn more, then consult with the experts at Paradigm Capital Management, Inc. Paradigm Management is a trusted leader in small cap and mid cap investing, and invests in value stocks of companies across all capitalization

Contact at (518) 431-3500 or visit http://www.paradigmcapital.com/