Market capitalization, or market cap, refers to the value of a company and is a measure of company size. Market capitalization is the value you get when you multiply all the outstanding shares of a stock by the price of a single share. For example, if a company has 10 million shares outstanding and its share price is $5, the market cap is $50 million. The market cap is generally listed on stock quotes you find on the internet.
Companies are grouped into market cap categories which are references to how large a company is measured by its market value. Here are the five basic market cap categories:
1) Micro cap (under $250 million): The smallest companies and riskiest stocks available. Penny stocks fall in this category.
2) Small cap ($250 million to $1 billion): Stocks with higher growth potential, but with higher risk. Typically includes new or young companies.
3) Mid cap ($1 billion to $5 billion): Some of the safety of large caps with some of the growth potential of small caps. These companies have operated in the marketplace longer than smaller companies and their stocks generally have less price volatility.
4) Large cap ($5 billion to $250 billion): Stocks for the conservative investor who wants steady appreciation with greater safety. These stocks are referred to as blue chips and include companies such as IBM.
5) Mega cap (over $250 billion): The largest companies that are typically leaders in their industry. Examples include Wal-Mart and Exxon.
There isn't universal agreement on the exact category cutoffs. Many investors prefer the three cap system of small, mid, and large, while others prefer to break it into more than the five categories listed above.
Market cap classification allows you to gauge the growth versus risk potential of a stock. Large caps experience slower growth with lower risk while small caps provide higher growth potential, but with higher risk. Market capitalization is important to consider, but dont invest just because of it. You can determine the value of a company in many ways, and market cap is just one measure of value.
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About The Author
Craig Tesch is the founder of X-investing, a free resource guide to investing and personal finance at http://www.xinvesting.com.