A company whose stock trades for $50 per share with 100,000 shares outstanding has a market cap of $5 million.
($50 x 100,000 shares)
Market cap is commonly used to assess the overall value and size of a company. Theoretically, the company with a $5 million market cap could be bought out entirely for $5 million, assuming all of the company’s shareholders were willing to sell off their shares to the buyer.
Market cap is presumed to be proportionate to the size of a company. It is used to determine whether a company is considered “small-cap,” “mid-cap,” or “large-cap.”
Market Cap Sizing
Small-cap stocks are generally thought to be those with a market cap less than $1 billion. Examples of small-cap stocks include:
Dorchester Minerals LP (NASDAQ: DMLP) – Market cap of about $475 million
AppFolio Inc. (NASDAQ: APPF) – Market cap of about $614 million
Mid-cap stocks are generally thought to be those with a market cap between $1 billion and $10 billion. Examples of mid-cap stocks include:
Transocean Ltd (NYSE: RIG) – Market cap of about $4.26 billion
Omega Healthcare (NYSE: OHI) – Market cap of about $5.62 billion
Large-cap stocks are generally thought to be those with a market cap over $10 billion. Examples of large-cap stocks include:
Apple Inc. [NASDAQ: AAPL] – Market cap of about $885.67 billion
General Electric Co. [NYSE: GE] – Market cap of about $174.66 billion
The Relationship Between Market Cap And Investing
Stocks may have very high share prices with lower market caps and vice versa. It is important, especially for newer investors, to recognize that market cap, not share price, is the metric that most adequately describes the value of a company.
Smaller-cap stocks are generally considered to be higher risk, higher reward. Small-cap stock prices tend to be more volatile than large-cap stock prices, so if you’re investing significant sums of money into small-cap stocks, brace yourself for a potentially wild ride.
Large-cap stocks, though they certainly have the potential to be volatile, are less likely to swing dramatically in value over short periods of time. They are considered lower risk, lower reward investments relative to smaller-cap stocks.
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