Market Cap
What is market cap?
Market cap is short for "market capitalization." It represents the value of a company, including all of its assets, capital, revenues, etc. Basically, if the company were to be sold for a fair price, it would be close to the market cap. Of course people may have different opinions of what a company's value is, but there is a certain way to calculate the market cap.
How do you calculate it?
The market cap is calculated as follows:
Number of Shares Outstanding X Market Cap of a share
This formula is easy to understand because the shares represent ownership of the company. All of the shares together represent the entire company, so we can find the value of the company by finding the total value of all of the shares.
Types of Market Cap
There are several approximations of market cap to determine the size of a business. There are different definitions from different sources, but the following is an approximate listing:
Mega Cap: Market cap of $200 billion and greater
Big/Large Cap: $10 billion to $200 billion
Mid Cap: $2 billion to $10 billion
Small Cap: $300 million to $2 billion
Micro Cap: $50 million to $300 million
Nano Cap: Under $50 million
Why is this important?
Different types of investors will invest in companies with market caps suited to their liking. For example, the mega cap companies like Wal-Mart, Exxon-Mobil, etc. are very stable, and if you want to invest in a solid, consistently performing company they are good choices. Investments generally become more risky, and there is more potential for gain and loss as the market cap decreases. Some investors tend to invest mostly in mid and small cap stocks because they want to maintain a riskier portfolio. Others have companies with different categories of market caps in order to maintain a mixed portfolio. Whatever you choose is based upon you and your goals.
In this picture from Reuters in 2005, you can see the average gain over 17 years for the largest cap stocks vs. the lowest cap stocks. For this sample firm, you can see that stocks with lower market caps are more volatile and have much greater potential for gain. Of course, they also carry greater potential for loss, so you should only invest if you have a certain degree of confidence in them.