Market Capitalization is a measure that tells you what a company is worth in the eyes of the entire investment community. Market Capitalization, or Market Cap, can be found on any financial site and is calculated by multiplying the current per-share price by the total number of shares outstanding. Simple enough, but the practical application of the measure depends to an extent on your investing beliefs.

Market Cap = Outstanding Shares x Per-Share Price

There are many who believe that it is possible to calculate the true value of a company irrespective of what the market is willing to pay based on current share price. These people are called fundamental value investors, and they believe that analytical techniques uncover stocks that are overpriced, as well as stocks that are bargains with share prices so low that they do not reflect the underlying value of the company.

There are others who believe that the value of anything is simply whatever buyers are willing to pay. For these people, the current Market Cap represents what it would cost to buy the entire company on any given day.

For both, Market Cap serves another purpose—it allows meaningful comparison across companies. In some ways, buying a stock is similar to buying any of the things you use throughout your life. Most people are unwilling to buy a product or service without comparing the potential purchase to similar alternatives. But there are literally tens of thousands of stocks—how can you compare shares of HSBC with shares of British Petroleum?

In an attempt to allow “apples to apples” comparison, companies are categorized by the business sectors in which they operate and by size. HSBC would be categorized in the financial sector while BP would be an energy, or oil and gas stock. Market Cap allows investors to compare companies by size as well as by sector—an “apples to oranges” comparison. A giant like BP has different advantages and disadvantages when compared to a smaller Oil & Gas Exploration company that has yet to produce a single drop of oil.

Market Capitalization is one way of measuring the value of a company, based on the current share price that investors are willing to pay multiplied by the number of shares in the market. What Market Cap does for investors is allow comparison of similar companies by size.

Market Cap Categories

Historically, stocks were organized into three size categories:

1. Large-Caps (more than $USD 10 billion),

2. Mid-Caps (between $USD 2 billion and $10 billion), and

3. Small-Caps (between $300 million and $2 billion).

The digital age and the rise of globalization have led to explosive growth in share market trading, so the traditional categories are no longer broad enough to represent current reality. Today, most market insiders expand the range of Large-Caps to an upper limit of $100 billion and have added new categories including Mega-Caps (over $100 billion) at the high end and Micro-Caps ($50 million to $300 million) and Nano-Caps (under $50 million) at the low end. There are advantages and disadvantages inherent in the stocks traded in each of these size categories.

Market Cap categories now include Mega-Caps for stocks over $100 billion, Large-Caps for stocks over $10 billion, Mid-Caps for stocks in the $2 billion to $10 billion range, Small-Caps for stocks between $300 million and $2 billion, Micro-Caps for stocks between $50 million and $300 million, and Nano-Caps for stocks under $50 million.

Advantages and Disadvantages of Trading Mega-Cap and Large-Cap Companies

Keep in mind that the advantages and disadvantages for each size category are broad generalizations that sometimes do not quite “fit” a particular stock. For every “rule” there are almost always exceptions.

A case in point is the advantage of stable financial performance. Typically, a major benefit of sticking with the “big dogs” in the market, known as Blue-Chips, is the track record that led them to the top of the heap. Companies get bigger when they provide growing returns on the investments of shareholders over time. However, some Technology and Internet stocks these days are obvious exceptions, when you consider the Market Cap of recent IPO’s Twitter (NYSE:TWTR) at over $25 billion and Facebook (NASDAQ:FB) at over $150 billion!

In addition, very large companies with mature market share are more likely to share the wealth with investors in the form of dividends. Many stocks in these categories have solid historical track records of increasing dividend payments over long periods of time, often regardless of economic downturns. Their capitalization allows them to survive economic turmoil and puts them in better positions to raise capital when needed, either through debt or equity financing (issuing new shares). The events of the years following the 2008 financial crisis have dramatically demonstrated the difficulties of financing for smaller companies.

Finally, these giant companies are very liquid, which means that the larger pool of buyers and sellers enables investors to sell quickly.

The major disadvantage can be summed up in the words of one of history’s proven investors, Peter Lynch, who famously said, “Big companies don’t make big moves.” If you’re looking for explosive growth in share price, the big boys are not for you. Also, if you prefer your own research as opposed to following the opinions of financial analysts, many larger companies have multiple revenue streams from business operations so diverse that financial analysis becomes a daunting task for average investors.

Advantages of trading Large-Cap and Mega-Cap stocks include financial stability, liquidity, and dividend payments. Disadvantages include slower share price appreciation and potential difficulties when analyzing financial statements.

Advantages and Disadvantages of Trading Mid-Cap Companies

In general, Mid-Caps will have more growth potential than the very large companies. Increasing market share is more likely with a growing Mid-Cap than with a Large-Cap that has been in business for decades or longer. Mid-Caps share this advantage with Small-Caps, but not to the same degree, and Mid-Caps are more likely to pay dividends. Mid-Caps will also be more liquid.

The disadvantages are mirror opposites. Growth in share price is less than that of smaller companies, and dividend payments and liquidity are lower than those of larger companies. The ability to raise needed capital is better with Mid-Caps than with small companies, but not as good as with large companies. In short, there is more overall risk with this category than with Blue-Chip stocks.

One thing to keep in mind with all categories is that Market Cap is fluid. Today’s Large-Cap may be tomorrow’s Mid-Cap.

Mid-Cap companies’ advantages and disadvantages are best understood by contrasting them with their larger and smaller brethren in the market place. The contrasting factors include share price growth, dividend payments, liquidity, financial stability, and availability of additional capital.

Advantages and Disadvantages of Trading Small-Cap, Micro-Cap, and Nano-Cap Companies

The advantages and disadvantages of trading stocks of smaller companies are similar, differing by matter of degree. Generally speaking, this is where the action is for investors with high-risk appetites. The potential of explosive share price growth can be astronomical, with highest possible returns for the smallest of the small. Some Micro- and Nano-Caps are dramatically cheaper to buy. However, in the long run, the higher risks associated with small companies can make them very expensive in the event that you lose your investment. The chance of bankruptcy increases with miniscule Market Caps. In addition, these companies are often difficult to research and have low liquidity.

As is the case with stocks in all categories, it is important to know if the stock has risen from a lower category to a higher one, or if it has fallen in size.

Small companies offer more potential for share price appreciation. The risk of loss is higher due to possible financial instability and challenging capital-raising requirements, dividends are smaller and less stable, there is less liquidity, and the companies can be hard to research.

Bottom Line

Market Capitalization allows investors to compare the stocks of similarly sized companies. Stocks are grouped into categories based on the number of shares outstanding multiplied by the current share price. Market Capitalization is not fixed, but changes every day with the rise and fall of share prices. Mega-Caps are stocks over $100 billion, Large-Caps are stocks between $10 and $100 billion, Mid-Caps are stocks between $2 billion and $10 billion, Small-Caps are stocks between $300 million and $2 billion, Micro-Caps are stocks between $50 million and $300 million, and those under $50 million are categorized as Nano-Caps.

Trading stocks in each category has advantages and disadvantages that revolve around the following factors:

1.      Share price appreciation

2.      Dividend payments

3.      Liquidity

4.      Financial Stability

5.      Ability to raise capital

6.      Ease of Research

Generally speaking, the degree of risk declines as you go down the scale, and the potential share price appreciation rises.

Summary:

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Market Capitalization is one way of measuring the value of a company, based on the current share price that investors are willing to pay multiplied by the number of shares in the market. What Market Cap does for investors is allow comparison of similar companies by size.

 

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Market Cap categories now include Mega-Caps for stocks over $100 billion, Large-Caps for stocks over $10 billion, Mid-Caps for stocks in the $2 billion to $10 billion range, Small-Caps for stocks between $300 million and $2 billion, Micro-Caps for stocks between $50 million and $300 million, and Nano-Caps for stocks under $50 million.

 

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Advantages of trading Large-Cap and Mega-Cap stocks include financial stability, liquidity, and dividend payments. Disadvantages include slower share price appreciation and potential difficulties when analyzing financial statements.

 

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Mid-Cap companies’ advantages and disadvantages are best understood by contrasting them with their larger and smaller brethren in the market place. The contrasting factors include share price growth, dividend payments, liquidity, financial stability, and availability of additional capital.

 

P
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Small companies offer more potential for share price appreciation. The risk of loss is higher due to possible financial instability and challenging capital-raising requirements, dividends are smaller and less stable, there is less liquidity, and the companies can be hard to research.

  

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