What Is Market Cap?
Market cap or Market Capitalisation is referred to as the total market value of a company based on its outstanding shares of stock.
Simply put, the market cap is the amount required to buy the company outright in just a single transaction.
If you are willing to evaluate a publicly-traded company’s value to purchase its stock, you need to look at its market cap. Also, the size of the market cap determines the category of a company like a small-cap, mid-cap, or large-cap.
You might be thinking how market cap is calculated? Well, it’s pretty simple.
How is it calculated?
Market cap is calculated by simply multiplying the company’s total number of outstanding shares by its current market price (CMP) of one share. For instance, if a company has 1 million outstanding shares selling for $30 each, the company’s market cap would be $30 billion.
Market Capitalisation=Outstanding share x current market price (per share)
Here, outstanding shares mean the current stock of a company that is held by its shareholders. This figure is used by the investment community to determine the company’s size as opposed to using its total asset figures and sales.
Company size indicates various characteristics of a company in which investors are interested, such as risk assessment, diversification of a company in different sizes, and so on.
Changes in Market Cap
You should know that two key factors can change the market cap of a company. First is the noticeable changes in the stock price and secondly when a company either repurchases or issues its shares.
Moreover, an investor can increase the number of company shares, specifically the one who exercises a huge number of warrants. Besides, shareholders are also affected due to dilution in which the current percentage of stockholder’s ownership is decreased as the company issues new stocks. In either case, a company’s market cap is altered due to the change in its share price.
Types of Market Cap
Since the market cap is represented in dollars, it is categorised into different ranges. Let’s face it.
- Small-cap ($300 million- $2 billion)
Mostly young companies have a small market cap that ranges between $300 million- $2 billion. These companies usually serve emerging industries or niche markets. Besides, some old businesses that have lost value for various reasons also have small-cap.
- Mid-cap ($2 Billion- $10 Billion)
Mid-cap companies are more volatile in comparison to large-cap companies. These medium-sized companies with a mid-cap can become an industry leader by improving their market share and overall competitiveness.
- Large-cap ($10 Billion- $200 Billion)
Companies that have large-cap are the industry leaders due to its high market value. Companies with a $200 Billion market cap and higher are referred to as mega-cap companies, and very few companies can qualify for this category.
Significance of Market Cap
Several investors, traders, and specifically beginners are often mistaken when they assess the company’s value and stability by its stock price. Market capitalization is the correct measure to determine its stability and market value rather than the stock price.
‘Price is what you pay for something, but VALUE is what you get’– says Warren Buffett
Mega-cap and large-cap companies allow more room for investors to invest a few hundred million in new business ventures. It is to note that in case the venture fails, it will not affect these companies. However, for a mid-cap company, the venture’s failure may be a big blow as they lack enough shares to bear the loss.
In contrast, if the venture becomes successful, large-cap companies can leverage from larger magnitudes of profits. Besides, the venture’s success for mid-cap companies allows them to boost their valuation in the market.
Similarly, small-cap and mid-cap companies’ existence and value are threatened when large-cap Company invades into their spaces. For example, Cloud hosting services were threatened by Amazon’s entry into their niche space.
A thorough understanding of the market cap is vital for investors as it helps them assess where they put their hard-earned money. Similar is the case with cryptocurrencies; if you want to buy any cryptocurrency, make sure you know its market cap and market value.
So, if you are interested in cryptocurrency, go and check out our website and start buying the cryptocurrencies that have a high market cap.