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Arpan Agrawal

Definition

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Considerations

Market cap is, unfortunately, a relatively volatile measure of size and scale. Because a primary component of the metric is the company's share price (significantly based on investor expectations, which can be extremely volatile in certain market conditions), market cap is unlikely to be reflective of the actual value of the company's equity. For example, market cap may increase/decrease pursuant to expectations of a merger or acquisition or industry obsolescence.

These expectations can have a larger impact on small-cap and micro-cap companies, which typically have fewer shares outstanding and fewer shareholders. Significant movement of shares one way or the other can disproportionately impact price, thereby greatly impacting the market capitalization.

Valuation

The methods of valuation are outside the scope of this article, but it has been empirically tested that small-cap stocks are more often mispriced than their large-cap counterparts. This is typically a result of less news, less interest, and more 'risk' in small-cap stocks, but savvy investors can capitalize on this (see [1] for an example)

Resources

1. http://bigpicture.typepad.com/comments/2005/07/small_cap_value.html
2. http://www.investopedia.com/terms/s/small-cap.asp?viewed=1
3. http://en.wikipedia.org/wiki/Market_capitalization