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What Is Market Cap? What You Need To Know (Video)

May 05, 2021 12:00 PM ET
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  • Market capitalization is a metric used to estimate a company's valuation.
  • Some investors use market capitalization when diversifying their portfolios.
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What is Market Capitalization?

Market capitalization is an easy way for investors to estimate the value of a company. This is calculated by taking a company's total number of shares outstanding and multiplying that by the current share price. Some investors use market capitalization when diversifying their portfolio.

The following text is a transcript for our readers who would like to follow along:

Market capitalization, or market cap, is the total dollar market value of a company's outstanding shares of stock. It is used to quickly estimate a company's value, but how is it calculated, and why do investors pay attention to it? Let's start with the calculation.

Market cap is calculated by taking a company's total number of shares outstanding and multiplying that by the current share price. For example, say Company Alpha has 400 million shares outstanding on the market, and at the close of market today its share price was $10 dollars. Well, the market capitalization for company Alpha would be $400 million dollars. But then there's Company Beta, which has 1 million shares outstanding in the market, and at the close had a stock price of $20 dollars. Well, the market capitalization of Company Beta is only $20 million dollars. So as investors it's important we take note of how many shares outstanding the company has, not just its share price.

So how do we use this information? Well, some investors like to track market capitalization if they're seeking to diversify their portfolio with companies of different sizes. There are four tiers of market capitalization that all public companies fall within. You have your large-caps, mid-caps, small-caps, and micro-caps. Large-cap companies are your Apple (AAPL), Amazon (AMZN), and Nike (NKE) of the world that carry a market capitalization of anything over $10 billion dollars. Mid-caps are companies that are experiencing rapid growth and are already recognized names. They carry a market capitalization between $2 and $10 billion dollars. Small-cap companies can be newer companies, or companies that operate within niche segments of the market, and they have a market cap of anything between $300 million and $2 billion dollars. And Lastly, micro-caps of course are the smallest, companies with a market capitalization below $300 million dollars.

Now, it can be really difficult to find the strongest small-cap companies that are right to diversify your portfolio. Luckily, Premium members of Seeking Alpha have access to the top small-cap stock screener that runs off the Seeking Alpha Quant Rating System. Which is a supercomputer that processes millions of calculations for investors so that you don't have to. This list updates daily before the market opens and provides investors with the strongest small-cap stocks without any human bias. So the bottom line, market capitalization is an estimate, which is the keyword, an estimate of a company's value. However, it is not the enterprise value of a company. Only a thorough deep dive into the fundamentals of the company can determine the true value. If you want to take a look at the top small-cap stocks on Seeking Alpha, click the link below this video for your free 14-day trial of Premium right now.

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