Traders deciding which stocks to buy look at certain figures. Market capitalisation is one of these figures that allows you to assess the potential risk of investing in a given company.
Market capitalisation is nothing more than the total value of a company's outstanding shares. It tells you the total amount of money that other traders and investors have placed in the company's shares.
Calculating a company's market capitalisation
To calculate a company's market capitalisation, all you need to do is multiply the current price of the stock with the number of shares that are outstanding.
Market capitalisation allows companies to be ranked according to size. Here are the 3 common market capitalisation categories:
- Large companies (large cap): companies whose market capitalisation is equal to or greater than 10 billion (£ / € / $). Most of these companies have a long history and/or a well-known household brand. They are typically industry leaders and are generally slow growing, not necessarily generating huge short-term profits. However, they generate solid returns over the long term and are considered low-risk investments.
- Medium-sized "mid-cap" companies: these companies are usually worth between 2 and 10 billion (£ / € / $). They are well established, but still have great potential for future growth. They are considered to be a riskier investment than the large companies mentioned above.
- Small companies (small cap): these companies have a market capitalisation of between 300 million and 2 billion (£ / € / $). They are generally more recent companies with good potential for future growth. Small cap stocks are considered riskier than the 2 above-mentioned categories because they tend to have limited resources and are more vulnerable to recessions and economic slow-downs.
What causes market capitalisations to fluctuate?
There are 2 things that can make a company's market capitalisation fluctuate:
- A major rise or fall in the share price. As an example, a company's stock price can rise quickly if the company launches a promising new product or reports large profits. But the price can also collapse if the company recalls a product that is flawed or dangerious (this sometimes happens to auto manufacturers).
- An increase or decrease in the number of outstanding shares. The number of outstanding shares of a company increases when it sells new shares to raise capital to finance major investments (factories, equipment, etc.) or global expansion. The number of shares outstanding decreases if the company buys back some of its shares, a process that returns money to its shareholders. Market capitalisation is therefore also linked to the number of shares that are out there.
Even though a "stock split" changes the number of outstanding shares, it has zero effect on the company's market capitalisation.
The world's largest market capitalisations (as of November 2020)
- Saudi Aramco: $2 trillion
- Apple: $1.970 trillion
- Microsoft: $1.634 trillion
- Amazon: $1.612 trillion
- Alphabet (Google): $1.113 trillion
- Alibaba: $831 billion
- Facebook: $812 billion
- Tencent Holdings: $693.10 billion
- Berkshire Hathaway (Warren Buffet's umbrella company): $509 billion
- Visa: $436 billion
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