What is market capitalization & how it can help investors?

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What is market capitalization & how it can help investors?

What is market capitalization?
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Highlights

  • Market capitalization shows the aggregate value of the company through which we know the company’s size and value.
  • The company’s aggregate value depends upon its shares price and total outstanding shares.
  • Public traded companies fall into three categories -- large-cap, mid-cap, and small-cap stocks 

Investing in the stock markets can sometimes feel like swimming in an ocean, where one needs to follow a long list of preventive measures before diving in.

To understand the whole concept of stock markets, you ideally need to have a basic understanding of some factors, such as a company’s market capitalization or market value.

With the knowledge of the market cap, you can be better guided to invest in the right company that may provide profit in the future. In other words, it can help investors make better investment decisions.

A detailed explanation of market cap

Market capitalization shows the aggregate value of a company and helps in knowing its value and size in the market. It is one of the methods to evaluate a company’s performance.

The company’s aggregate value depends upon its shares price and total outstanding shares. The company listed on the stock market has a share price, multiply that share price with the total number of outstanding shares and you will get the market value. 

Also read: Market capitalisation and market value: what’s the difference?

For example, if a Canadian company has one million total outstanding shares, and the current market price is C$ 50 per share, the market value or market capitalization of said company will be 1,000,000 x 50 = 50,000,000.

How to calculate market capitalization?

Image credit: © 2022 Kalkine Media® 

How can market cap help investors?

It is necessary to understand how to calculate market capitalization for growing a business. The understanding of a company’s market value helps investors to take appropriate decisions.

It is also important to understand that various factors can affect the numbers in market cap, such as financial decisions, market fluctuations, modifying the company’s structure, etc. 

Also read: 5 successful stock market strategies for newbie investors

According to their market capitalization, public traded companies are divided into three categories, including large-cap stocks, mid-cap stocks, and small-cap stocks. 

Large-cap stocks

Businesses having a market cap of C$ 30 billion or more fall in this category. Businesses that are listed as large-cap stocks are generally stable and less risky compared to other stocks due to their large capitalization.

It is anticipated to provide good liquidity, potential for moderate returns, and low volatility. Some large-cap companies are the Royal Bank of Canada (TSX: RY), Shopify Inc (TSX: SHOP), etc.

Mid-cap stocks

Businesses having a market cap between $3 billion to $30 billion fall in this category. They consist of medium-sized market capitalization. These stocks may provide decent return potential.

However, investment in these stocks is riskier than large-cap stocks. Some mid-cap companies are Aritzia Inc (TSX: ATZ), MEG Energy Corp (TSX: MEG), etc. 

Small-cap stocks

Businesses having a market cap of $300 million to $3 billion fall into this category. These have small market capitalization but assumedly have high return potential for investors.

Small-caps are not very well established as compared to large and mid-caps. So thus, investing in these stocks is very risky. Some small-cap stocks are Celestica Inc (TSX: CLS), IBI Group Inc (TSX:IBG), etc. 

Also read: 5 best midcap stocks to include in your 2022 portfolio 

Bottomline

For evaluating and determining a company’s performance, size and structure, market capitalization proves helpful. It reflects the total market value of the company and is considered a good method for demonstrating the company’s development at each stage.

Disclaimer

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