Finding the Right Size (Market) Cap
There are a lot of factors that go in to evaluating a stock- its P/E ratio, current price, YTD, monthly trends- the list goes on. One metric which is occasionally overlooked is a company Market Cap(Capitalization), which is the company’s share price multiplied by its outstanding shares. It’s important to keep the following information in mind when judging a stock by its market capitalization.
CATEGORIES
Publicly traded companies are sorted into one of three categories, denoting the size of their market cap. The parameters for each category fluctuate slightly with the market, but for the most part the categories are as follows:
Small Cap: Under $1 billion
Mid-Cap: $1–10 billion
Large Cap: More than $10 billion
Large Cap stocks describe corporations such as Apple and Amazon, which are considered very safe investments, but without much room for growth. Small Cap stocks describe corporations that still have room to grow, but could be considered risky as there is no precedent for their performance.
What It Means
It is important to remember that the market cap is essentially a measure of how much it would cost to buy up all of a company’s shares, not the company itself. In other words, the market cap provides insight on the public’s valuation of a company, regardless of its intrinsic value.
Including market cap among other financial metrics in making investment decisions is a great step towards creating the ideal portfolio.
