Monday, June 13, 2016

Market Capitalization

When you are investing it is important to make sure that your investments are well diversified. One way to diversify your investments across asset classes is based on a company’s size. When looking at mutual fund option you might see labels like large-cap growth or small-cap value in the names of investments. When you see this information, you will know the cap refers to the general size of the companies included in the fund.

People in the financial industry often group companies into three major categories based on the amount the companies are worth. There is some variation among financial experts regarding the exact range for each category, but this is a general breakdown of the major categories of companies by value from what I was able to find:

     - large cap (large capitalization) = $8 billion or more
     - mid cap (mid capitalization) = $1 billion to $8 billion
     - small cap (small capitalization) = less than $1 billion

So, Market Capitalization – commonly referred to as market cap – is a number that describes the amount of money a company is worth on the open market. To figure market cap, you simply multiply a company’s share price by the number of shares available to the public (i.e., the number of outstanding shares). For example:

     - If Company Z has 20,000,000 outstanding shares and the current share price is $100 ($100 for one share of Company Z stock), the market cap for Company Z is $2 billion.
     - We figure with the following calculation: 20,000,000 X $100 = $2,000,000,000

Therefore, in this example, Company Z would be considered a mid-cap company.

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