What is Market Capitalization?
Market capitalization, also known as market cap, is the total value of shares of stock in a company. For instance, if a firm issued 10 million shares, and its share price is $100, its market cap would be $1 billion.
How can you calculate it? Just multiply the outstanding stock shares by their current share price. The outstanding shares include all shares open to the public and restricted shares available for specific groups.
Also, it is a metric that can make it easier to understand the financial scope of a company. It helps investors to assess a company based on how valuable the public thinks it is. The greater the value, the bigger the company. The size and value can make you see the risk level you are getting into if you start investing in its stock. Moreover, it can tell how much of your investment could return.
Large companies tend to have more stability and maturity in their businesses since they proved themselves after a long time and managed to handle struggles in business conditions to get stronger. However, growth prospects for those kinds of companies can be limited because they took advantage of their primary opportunities to get where they are.
When it comes to smaller companies, they still have more room for growth, are usually younger, and have business models with risks that are yet to be proved themselves. Additionally, their odds of failure could be higher than larger companies.
Furthermore, firms can deliver robust per-share returns even if they do not expand their market cap fast. Share repurchases that make the share count smaller reward long-term investors with a more outstanding piece of the company as its dividends put money back directly to you. These factors can significantly reduce the market capitalization needed to grow for investors to earn above-average returns.