Market Capitalization

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What is market capitalization?

You've probably heard stocks, companies, or mutual funds be categorized by large-cap, mid-cap, and small-cap. What in the world do these mean?

Actually, it's a very simple concept. Market capitalization is one gauge investors use to determine how big a company is. And it's an important one to understand. The calculation is simple, really. Just take the current share price of the company's stock and multiply it by the total number of shares that are outstanding.

For example, let's say ABC, Inc. has a current share price on their stock of $30.00 and that they have a total of 1.8 million shares of stock outstanding. This means that ABC, Inc. has a market capitalization of $54 million.

That's great, but what does that mean? Sure it's nice to know the company's market cap, but it doesn't mean anything if you don't know what to compare it to. Below is a list of the various market caps and the generally accepted thresholds for each category:

Mega-Cap: This includes companies sized at $200 billion and greater.

Large-Cap: This includes companies that have a market cap between $10 and $200 billion.

Mid-Cap: This includes companies that have a market cap between $2 and $10 billion.

Small-Cap: This includes companies that have a market cap between $300 million and $2 billion.

Micro-Cap: This includes companies that have a market cap between $50 and $300 million.

Nano-Cap: This includes companies that have a market cap lower than $50 million.

It's important to keep in mind that the smaller the capitalization of a company the more relative risk you assume for investing in that company. Although, the more assumed risk you take, the more the potential for larger returns as well. Smaller cap companies have the ability to grow –and grow rapidly—than do large cap companies. Large cap companies have already grown to tremendous sizes and have reached a plateau in their stability (this isn't to say, however, that a large company can't increase its level of stability or lose it altogether – that's the risk of investing).