The value of a company can be determined in many different ways. There are also just as many different ways to determine the value of its stock. The most basic and easiest to understand way to measure this value, both the company and the stock, is to look at the company’s market value. This is also known as the company’s market capitalization, or its market cap. Market capitalization is the value you get when you multiply all the outstanding shares of the company’s stock by the current price of a single share.
Calculating the company’s market cap is relatively easy after all. Its just the current sales price of one share multiplied by the total number of outstanding shares the company has. So, if the company has a current share price of $ 15 per share and it has 10 million outstanding shares of stock, the market cap would be $ 150 million.
You can also measure how large a company is by measuring its market value. Its market value is often categorized using terms such as small cap, mid cap, and large cap and no, we are not talking about the size of the hat the CEO wears. There are five basic stock categories of market capitalization:
Micro Cap: The stocks of these companies are the smallest and therefore contain the most risk. A micro cap company has a market cap of under $ 250 million.
Small Cap: These types of stocks tend to fare a bit better than the micro caps as they still have plenty of growth potential. I’ll caution you though that the key word used is ‘potential’. A small cap company has a market cap of $ 250 million to $ 1 billion.
Mid Cap: This category offers a good compromise between large cap and small cap companies. These tend to be a bit more safe, then the small caps, yet still offer some of the growth potential. A mid cap company has a market cap of $ 1 billion to $ 5 billion.
Large Cap: A company qualified as a Large cap company is usually reserved for conservative stock investors who are willing to sacrifice huge swings for steady appreciation and safety. These are also known as “Blue Chip” stocks and have a market cap of $ 5 billion to $ 25 billion.
Ultra Cap: The Grand Daddy of them all. These are also known as “Mega Caps” and are obviously referring to only the largest companies. These are the big boys, names such as General Electric, IBM, and Exxon Mobil. These companies have a market cap of over $ 25 billion.
From a safety and security point of view, the company’s market value and size do factor in. If all things are to be considered equal, then a large cap stock would be considered safer than a small cap stock. However, the flip side of this is that small cap stocks have greater growth potential and therefore potentially higher returns.
There is a great analogy to help you remember this basic concept. Compare stocks to trees. Which is sturdier a giant redwood or a small one year old oak sapling? In a great storm the redwood will hold up well, while the sapling will have a rough time being blown around. but you also have to remember that the redwood may not grow much more, but the sapling has plenty of growth to look forward to.
Don’t invest (or not invest) just based on market cap alone. Its just one measure of value. You need to look at several other factors to seriously determine whether any given stock is a good investment.
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