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About Market Capitalization

Photo by Markus Spiske on Unsplash

Market capitalization, or simply Market Cap, refers to the overall dollar market value of a company’s outstanding stock to estimate cumulative values and apply to cryptocurrency the same way it does to traditional stock markets. 

Market cap is notoriously a fast and straightforward method in measuring a company’s value by extrapolating what the market feels is worth, especially for publicly traded stocks. 

Going Public

The market cap of a company is first established by an Initial Public Offering (IPO). Before that, a company that wishes to go public needs to hire an investment firm. The investment firm will then use valuation methods to derive the company’s value to determine the number of shares and at what price per share.

Price Dictated by Supply and Demand

After a company gets listed and begins trading on an exchange, its shares are dictated by the supply and demand for its market stock. The price of a share will rise when there is a strong demand due to favorable factors. Conversely, the price of the share falls when the demand for it becomes stale. 

The Market Cap Calculation

Market cap = share price x # shares outstanding
Taken from investopedia.

For example,

Altcoin Z is presently worth $10 and has a circulating supply of $20 million. In this case, Altcoin Z has a market cap of $200 million.

Investment & Market Cap

It is an important task to understand what a company is worth and is often difficult to ascertain quickly and precisely. 

Given its simplicity and effectiveness in assessing risk, the market cap measures a business’s valuation by extrapolating what the market feels is worth for publicly traded stocks and how to diversify your portfolio with companies of different sizes, classified Large-cap, Mid-cap, or Small-cap.

Large-Cap

Large-cap firms typically are established for a long time and are major players in well-established industries. These large-cap firms usually have a market capitalization of $10 billion or more. Investing in large-cap firms does not inherently offer significant returns in a short period. Still, these companies usually reward investors with a steady rise in share prices and dividend payments over the long term – Take Microsoft (MSFT), for example.

Mid-Cap

Mid-cap companies usually are firms in the midst of expansion and have market capitalizations of between $2 billion and $10 billion. They are usually considered companies projected to experience rapid growth in the market, rendering them potentially at higher risk than large-cap companies because they are not as mature and are appealing for their growth potential. An example of a mid-cap company is Eagle Materials (EXP).

Small-Cap

Small-cap companies are firms with a market capitalization of between $300 million and $2 billion. These small businesses may be young in age and represent niche markets and emerging industries, thus are perceived to have a higher risk in investments. Further, small-cap companies with less resources are more vulnerable to economic slowdowns as their share-prices tend to be more volatile and less liquid than mid-cap or large-cap companies. An example of a small-cap company is Micro-cap, valuing between approximately $50 million and $300 million. 

A Common Misunderstanding

While often used to characterize a company, only a detailed study of the fundamentals of an organization will measure the value of a company’s equity. It is insufficient to value a company since the stock price on which it is centered does not automatically represent the value of a part of the firm.

Often, shares are also over-or undervalued by the market, which means that the market price dictates just how much the market is willing to pay for its shares. Although it calculates the cost of purchasing all the shares of a company, the market cap does not calculate the amount that the company would have cost to purchase in a merger deal – A way to do that is to calculate the enterprise value

In Summary

  • Market capitalization refers to how much a company is worth as determined by the stock market and is defined as the total market value of all outstanding shares.
  • A company’s market cap is calculated by multiplying the number of outstanding shares by the current market value of one share
  • Three categories: Large-cap ($10 billion), Mid-cap ($2-10 billion) and Small-cap ($300 million – $2 billion)

For related articles, read DigiFinex Academy.

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