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WIKI ANALYSIS| This article is part of WikiProject Definitions. Consider editing to improve it. View articles referencing this definition. |
Definition
Market Capitalization: The number of Company shares outstanding times the price of the stock.
While there are no set definitions for market caps, a few terms are frequently used to group companies by capitalization. In the U.S., companies and stocks are often categorized by the following approximate market capitalization values, regardless of the exchange which they are traded on:
Categories
- Large-Cap: Market Cap over $10 billion. [e.g. Wal-Mart (WMT)]
- Mid-Cap: Market Cap between $2 billion and $10 billion. [e.g. Macy's Inc. (M)]
- Small-Cap: Market cap between $250 million and $2 billion. [e.g. Ariba (ARBA)]
- Micro-cap. Market Cap under $250 million [e.g. Selectica (SLTC)]
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
- http://bigpicture.typepad.com/comments/2005/07/small_cap_value.html
- http://www.investopedia.com/terms/s/small-cap.asp?viewed=1
- http://en.wikipedia.org/wiki/Market_capitalization
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