Let's Talk... Market Capitalization

Today’s newsletter is going to be short and simple.

One of the first stats you see when you pull up a stock is market capitalization.

Market capitalization, also known as market cap, is one way to measure a company’s size.

Market cap represents the total dollar amount or ‘market value’ of a company's outstanding shares of stock.

Basically, it’s the company's value on the open market.

This is how you calculate it:

Market Cap = Current Share Price * Total Number of Shares Outstanding

For example, a company with 10 million shares selling at $100 a share has a market cap of $1 billion.

($100 × 10,000,000 = $1,000,000,000)

Pretty simple, right?

The Financial Industry Regulatory Authority (FINRA) categorizes companies based on their market caps:

• Mega-cap = market value of $200 billion or more.

• Large-cap = market value between $10 billion and $200 billion.

• Mid-cap = market value between $2 billion and $10 billion.

• Small-cap = market value between $250 million and $2 billion.

• Micro-cap = market value of less than $250 million.

You’ve probably noticed some exchange-traded funds (ETFs) and mutual funds use market cap as a measure to group companies together.

For instance, $VOO (Vanguard S&P 500 ETF) is made up of mega-cap and large-cap stocks (companies with a market value of $10 billion or more).

Market cap provides a good indication of a company's stability. Large-cap and mega-cap companies are considered more mature and stable. Micro-cap and small-cap companies, on the other hand, are still in their early stages and may be more affected by market fluctuations.

Next time you evaluate a stock, take a look at its market cap and determine which category it falls into.

Darrell