There are numerous ways to determine the value of a company. When you can determine it’s value, you can then determine the value of its traded shares. The most basic way to do it is to look at the company’s market value, which is also referred to as its market capitalization, or market cap.
So how do you calculate a company’s market capitalization? It’s not as diffuclut as you might think. It’s simply the number of shares a company has outstanding multiplied by the current share price. So as an example, if a company has a million shares outstanding and its current share price is $15, the company’s market cap is $15 million…Simple eh?
How large a company is can be measured by its market cap. Here’s a list of the the five basic stock categories of market capitalization:
1) Micro cap – These are companies that are under $250 million. These stocks are the smallest available and tend to be the most risky.
2) Small cap – These companies are worth $250 million to $1 billion dollars. The stocks of these companies are less risky than micro caps, but still have a lot of growth potential. However, the key word in this description is “potential”, so still make sure you do your homework!
3) Mid cap – Mid cap companies have a value of $1 billion to $5 billion. This kind of company gives investors a good compromise between the small and large cap companies. This gives the investor the chance to invest in a company that have have a degree of safetly found in large cap companies while still having some of the growth potential of a small cap company
4) Large cap – these companies are referred to as “blue chips” and have a worth of $5 billion to $25 billion. These companies are more for conservative investors as they appreciate on a steady rate and are relatively safe.
5) Ultra cap – These caps can also be referred to as “mega caps” and are the real “big boys” of the share market. Companies such as General Electric and Microsoft are good examples. Investing in these companies can be very expensive, but you can be assured the company won’t go bankrupt (and have ther share values drop to zero) over night.
So which ones should you go for? It all depends on what your goals are. Large caps tend to do better than small caps, but remember that even a company like Microsoft was once a small cap and therefore small caps have a lot greater growth potential.
An easy way to think of this is to compare stocks with trees. Think of a small cap stock as an oak tree that is a year old, and think of a large cap stock as a giant redwood that is over 200 years old. In a storm (ie turmoil in the stock market as we tend to see every few years), the oak tree is going to have rough time and may even die, while the redwood will be very sturdy and highly unlikely to suffer much damage after the storm is over. However, the oak tree still has a lot of potential for future growth whereas the giant redwood may not grow very much more over its lifetime.
Even though market capitalization is an important consideration, it shouldn’t be the only way to decide. It’s just one measure of value. If you are going to become a serious investor, you will need to look at numerous other factors to determine if a company’s shares are worth investing in.