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Market Cap

A company's market capitalization, often called market cap, can be obtained by multiplying the number of outstanding shares (number of shares the company has issued) by the price of the stock.

Companies are often labeled by the size of their market cap. A company with a market cap over 5 billion dollars is called a large cap, one with a cap between 500 million and 5 billion is referred to as a mid cap, one with a cap between 150 and 500 million is called a small cap and one with a cap below 150 million is labeled a micro cap. Even though a " label " may not seem important, a company's market cap often affects its stock price dramatically. In addition, when a company wants to acquire another public company it has to pay for its "market cap" and add a premium to appease stockholders and management.

When a fund manager researches for stocks to invest capital in he is usually restricted by the company's market cap. Because most fund managers direct funds who concentrate on large caps, stocks with relatively small market caps are usually left out from a manager's purchase list. Stocks bought by fund managers usually get an artificial lift because of the large amounts of stock bought by them. In addition, investors sometimes use fund ownership as a critical criterion to buying a stock.Another effect of a company's market cap can be seen in today's volatile market. Companies with large market caps and established leadership such as: McDonalds, GE, IBM have been left in a better position than those technology stocks whose market caps were smaller and leadership was untested. Such companies have lost more than half of their value as investors flock to "old economy" stocks.Although a company's market cap is but a number, its implications are widespread. When buying a stock you should make sure that the company has a market cap that fits with your investment strategy. A person who is investing for a conservative cause should not buy stock with Micro caps because of their inherent risk.

 

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