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Investing Glossary

Market Cap

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Market Cap refers to the total dollar market value of a company’s outstanding shares of stock. The investment community uses this figure to determine a company’s size instead of sales or total asset figures. In an acquisition, the market cap is used to determine whether a takeover candidate represents a good value or not to the acquirer. Market capitalization refers to how much a company is worth as determined by the stock market. It is defined as the total market value of all outstanding shares. To calculate a company’s market cap, you multiply the number of outstanding shares by the current market value of one share. Companies are typically divided according to market capitalization: large-cap ($10 billion or more), mid-cap ($2 billion to $10 billion), and small-cap ($300 million to $2 billion). Market cap is often used to determine a company’s size, then evaluate the company’s financial performance to other companies of various sizes. When it comes to investing, companies with larger market capitalization are often safer investments as they represent more established companies with generally longer history in business. Market capitalization is a quick and easy method for estimating a company’s value by extrapolating what the market thinks it is worth for publicly traded companies. After a company goes public and starts trading on the exchange, its price is determined by supply and demand for its shares in the market. If there is a high demand for its shares due to favorable factors, the price would increase. If the company’s future growth potential doesn’t look good, sellers of the stock could drive down its price. The market cap then becomes a real-time estimate of the company’s value. Given its simplicity and effectiveness for risk assessment, the market cap can be a helpful metric in determining which stocks you are interested in, and how to diversify your portfolio with companies of different sizes. Although it is used often to describe a company, the market cap does not measure the equity value of a company. Two main factors can alter a company’s market cap: significant changes in the price of a stock or when a company issues or repurchases shares. Stocks represent ownership in companies of various sizes. Understanding the relationship between company size, return potential, and risk is crucial if you’re creating a long-term investment strategy.

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