Market capitalization, popularly known as ‘Market Cap’, is one of the most prominent parameters that the investors take into consideration while putting their money in a company. It is an important indicator of a company size that also helps the investors ascertain the return potential and risks before investing in the shares.
What is Market Capitalization?
It is basically the outstanding number of shares of a company multiplied by its current market price.
Market Capitalization = Total Number of Outstanding Share x Current Share Price
How Market Cap is Calculated?
The market cap of a company is calculated in the following manner:
Let us assume for a Company XYZ
Total Number of Outstanding Share: 1,00,000
Current Market Price of One Share: Rs 30
Market Cap of a Company XYZ = Rs 30 lakh
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Types of Market Capitalization
The stocks of the companies are of three types, which are mentioned below:
These are stocks of those companies that are basically in the early stage of development and have low revenue and have a small client base and employees. It is important that an individual must carry out a comprehensive research work before investing in these stocks. They must determine the goodwill, business model, debts, financial strength, etc of the company before investing. These companies have a substantial growth potential but it must also be noted that the risk of failure is higher in the small-cap stocks when compared with the other two stocks. It is suitable for those investors with a high-risk appetite.
These are those stocks that are considered to be relatively smaller when compared with the large-cap companies in terms of the market capitalization, profits, client base, and revenue. Many investors tend to get attracted towards the mid-cap stocks because they have a potential of becoming tomorrow’s success stories and provide good returns to the investors if invested for the long-term. The shared liquidity of these companies is higher when compared with the large-cap stocks. Due to the rise in the price of large caps in recent years, big investors like the mutual funds and Foreign Institutional Investors (FIIS) are opting to invest in the mid-cap stocks.
These are the stocks of reputed companies that are well-established in the market. The large-cap companies are known for their stability and consistent returns. These types of stocks are considered to be the safest investments. They have a proven business model, which goes on to create a positive sentiment among the investors or shareholders. People looking for the steady return on their investments, particularly opt for the long term can consider these stocks.
Market Cap Vs Stock Price
Most of the people tend to get confused between the market cap and stock price, but these are two different things. A stock price is basically the cost of buying a share in the stock market or exchange. Many people believe if the stock price of a company is on the higher side, then its market cap will also be larger. This is not always the case. It is possible that a company with a low stock price can also have a higher market cap. Therefore, market capitalization is one of the best means to determine a company’s overall size, not the share price.
When you are planning to buy the shares of the company, it is extremely important to have a look at the market cap to determine the growth and return the probability of the shares, especially when you are planning to invest for the long-term. Hence, you must not ignore the importance of the research work here and do not get too concerned with the stock price because if the share prices of the company are on the higher side, then it does not signify that it is a valuable company.
Note: All information & data provided in this article is for the educational purpose as well as to give general information on the finance & economy, not to provide any professional advice or service. Views & opinions are not biased against the company and do not affect any official policy or any other agency, an organization within the content.