Trillionaire Term of the Day - January 5, 2009

Market Capitalization (Market Cap)

Market Cap is the measurement by which we classify a company’s size and value.  We calculate a company’s market cap by multiplying the stock price by the number of shares outstanding.  For example, General Electric (GE) has a stock price of 15.67 and has 9.96 billion shares outstanding.  When these two numbers are multiplied you are left with GE’s market cap, which is 155.9 billion. 

A common misconception is to believe that when comparing two companies, the company with a higher stock price is the larger company.  This is wrong, as the way to find out which company is larger is to compare their market caps.

There are three different sub-groups of market caps: Large cap, mid cap, and small cap.  Large cap companies range from $10 billion and up, and these are mostly very well known companies such as Wal-Mart (WMT), Yahoo (YHOO), and Exxon (XOM).  Mid cap companies range from $2 billion to $10 billion in market capitalization.  These companies are considered to be more volatile than large caps, but they have more room for growth.  Small cap companies, which are relatively young, have market caps ranging from $300 million to $2 billion.  The companies that fall into the small cap range have the most risk, but they have the most room for growth.  These ranges for market cap are not set in stone, but they are good guidelines.

Conclusion:  Knowing a company’s market cap greatly influences the way in which many investors choose their stocks.  Investors looking for stability will look harder at large cap stocks, while investors looking for higher growth and willing to tolerate more risk and volatility will probably invest more in mid cap and small cap stocks.