Even smaller than small cap stocks, micro caps typically represent companies that have a market capitalization below $300 million. Of all the sizes mentioned, micro-cap stocks carry the greatest risk but also the highest potential to expand. Mid-cap stocks represent companies that have a market value between $2 billion and $10 billion. Mid caps are usually moderately risky but generally stable companies that still have room to expand. Since mid caps often offer both dividends and price appreciation, they can give investors a balance between income and growth.
Using Market Capitalization for Performance Metrics
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- This value provides a snapshot of the company’s current market value and is a dynamic metric that fluctuates with changes in stock prices.
- If a house is worth $1,000,000 and has a $700,000 mortgage, the equity value is $300,000.
- However, if the company’s market cap is four times as large, the argument could be made that the company is underperforming.
Outstanding shares are shares that have been issued and sold to shareholders, including those held by insiders and institutional investors. The calculation does not include treasury shares, which are shares of the company that it has repurchased. Market capitalization refers to the total dollar market value of a company’s outstanding shares. It is thus calculated by multiplying the total number of a company’s shares by the current market price of one share. The investment community uses this figure to determine a company’s size, and basically how the stock market is valuing the company.
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Larger companies, on the other hand, may be more established and stable in terms of maintaining their stock values. They might also pay dividends, which can be helpful for investors looking to draw an income from their holdings. One of the most common ways to evaluate public companies is by market capitalization, or “market cap” for short. Market cap is often used as a baseline for analysis as all other financial metrics must be viewed through this lens.
How Does Market Cap Affect Stock Price?
If a house is worth $1,000,000 and has a $700,000 mortgage, the equity value is $300,000. A company with a Market Cap (equity value) of $10 billion and debt of $5 billion has an Enterprise Value of $15 billion. Finance Strategists is a leading financial education organization that connects people with financial professionals, priding itself on providing accurate and reliable financial information to millions of readers each year. Our team of reviewers are established professionals with decades of experience in areas of personal finance and hold many advanced degrees and certifications. This metric facilitates performance comparisons, aids in investment attraction due to liquidity and credibility, and guides investment strategies based on perceived stability.
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Along with companies, other popular investments like mutual funds and exchange-traded funds (ETFs) are also categorized as small-cap, mid-cap, or large-cap. In the case of funds, the terms represent the types of stocks in which the fund primarily invests. A company’s market cap can be found by multiplying the current stock price by the total number of outstanding shares.
Although it is used to describe a company, market capitalization does not measure the equity value of a company. Shares are often over- or undervalued by the market, meaning the market price determines only how much the market is willing to pay for its shares. Mid-cap companies generally have a market capitalization between $2 billion and $10 billion. Mid-cap companies operate in an industry expected to experience rapid growth. Mid-cap companies are in the process of expanding and carry an inherently higher risk than large-cap companies. A company with 20 million shares selling at $100 a share has a market cap of $2 billion.
It can be used to evaluate a company’s stock performance, such as the P/E ratio or P/B value. As an investor, you should keep an eye on any company’s market cap, as it can tell you whether it is a good investment, how risky it is, and how your investment may perform over time. Long-term investors — for example, those saving for retirement that’s decades away — could benefit from the potential growth of small- and mid-cap companies and still have time to weather unexpected downturns. These companies are considered to be the riskiest, and the potential for gain varies widely. These stocks typically trade on the pink sheets or Over-the-Counter Bulletin Board (OTCBB). While they offer higher growth potential than large-cap companies, they also come with a higher risk.
The investing information provided on this page is for educational purposes only. NerdWallet, Inc. does not offer advisory or brokerage services, nor does it recommend or advise investors to buy or sell particular stocks, securities or other investments. Such indexes not only represent the overall market developments and sentiments, but are also used as benchmarks to track the performance of various funds, portfolios, and individual investments. Outstanding shares are the total amount of shares currently held by all its shareholders, including share blocks held by institutional investors and restricted shares owned by the company’s officers and insiders. For instance, technology companies often have higher market caps compared to firms in traditional sectors like manufacturing. One of the primary limitations of relying solely on market capitalization is that it ignores other vital financial metrics.
Market cap is a metric that makes it easier to understand a company’s financial scope. It allows investors to size up a company based on how valuable the public perceives it to be. The size and value of a company can inform the level of risk you might expect when investing in its stock, as well as how much your investment might return over time. This means that stocks with larger market capitalizations make up comparatively more of the index. The different measurement of Market Cap values also form the basis to launch a variety of market indexes.
Investments in such companies may not be for the faint-hearted and require more due diligence.
For example, a company could have had twice as much revenue as any other company in the industry. However, if the company’s market cap is four times as large, the argument could be made that the company is underperforming. There are two other market-cap categories, generally referred to as micro-cap (below $250 million) and mega-cap (the largest companies on the stock market, some of which overlap with large-cap). Small-cap stocks are often young companies with the potential for high growth. These stocks may have the possibility of high returns (that small-cap could indeed grow to be a mid- or large-cap), but they also come with the possibility of significant losses.
Market capitalization is the aggregate dollar-value of all outstanding shares of a company’s stock. Investing in micro-cap stocks can be very risky as these companies can be more susceptible to market volatility, limited liquidity, and less regulatory oversight. They are usually young businesses and might operate in emerging industries or niche markets.
Some of the companies may or may not be industry leaders, but they may be on their way to becoming one. For example, the social media company Reddit (RDDT) is a mid-cap company, with a market cap of $9.84 billion as of the market close on June 18, 2024. Companies that are considered large-cap have a market cap between $10 billion to $200 billion.