What Is Market Capitalisation And How Is It Calculated?
Market capitalisation, often called a market cap, is a measure of a company’s total value as perceived by the stock market. It’s calculated by multiplying the current stock price by the total number of outstanding shares. The formula to calculate market cap is:
Market Cap = Current Stock Price × Total Number of Outstanding Shares
It categorises companies into different groups based on their sizes:
- Large-cap: Companies with a market cap over $10 Bn.
- Mid-cap: Companies with a market cap between $2 Bn and $10 Bn.
- Small-cap: Companies with a market cap of less than $2 Bn.
How Can It Be Used In Investment Strategies?
Using market capitalisation, investors select investments based on risk and prospective return. Large-cap stocks are typically viewed as secure but with sluggish growth; mid-cap stocks are balanced; and small-cap stocks may be riskier but have greater growth potential.
How Does Diluted Market Capitalisation Impact Shareholders?
The diluted market capitalisation takes into account not only outstanding shares but also possible shares from options, bonds, etc. It is crucial because it indicates the maximum number of shares that could exist, potentially diluting the ownership of existing shareholders.
What Common Misconceptions Exist Regarding Market Capitalisation?
A common misconception is that it is the price at which a company could be acquired. In actuality, acquisition costs frequently exceed it.
What Does A Company’s High Market Capitalisation Reveal?
A high market capitalisation indicates a well-established presence in its industry. It is generally considered a secure investment, but its development may be delayed compared to that of lesser companies.
Does It Impact The Share Price?
It does not affect the stock price directly. The price of a stock is influenced by supply and demand. However, variations in market capitalisation can affect investor sentiment, thereby influencing stock prices.
What Role Does It Play In Determining The Value Of A Company?
It provides a rapid evaluation of a company’s scale and influence. It assists investors in selecting investments consistent with their goals and risk tolerance. Additionally, it affects the performance of various benchmarks and stock market indices.
