Market capitalization, or market cap, measures a company’s worth by looking at the total value of its outstanding shares.
Companies are typically divided into three categories: small-cap, mid-cap and large cap. Investors often use market cap to evaluate an investment’s potential risks and benefits.
Market cap provides a quick, easy estimate of what the market says a company is worth. It’s calculated by multiplying a company’s share price by the number of shares in circulation. For example, a company with one million shares worth $100 each would have a market cap of $100 million.
A company's share price depends on factors like supply, demand and investor sentiment. In turn, this affects market cap, as its value fluctuates with changing stock prices.
Note that market cap can also change due to a company issuing new shares or an investor exercising their warrants. That said, market cap is usually not affected by stock splits or dividends, as share price usually drops to compensate.
Knowing a company’s market cap can give you an idea of its value and potential risks and benefits. Additionally, investing amongst varying market caps is an easy way to diversify your portfolio and mitigate risk.
Generally, you can divide companies into three basic categories:
You can also invest in micro-caps, valued between $50 million and $300 million, or mega-caps valued over $200 billion. Unsurprisingly, micro-caps tend to be riskier with greater growth potential. Mega-caps are lumbering behemoths of the investment world: they don’t move quickly, but they can offer stability and decreased risk.
Overall, understanding market capitalization makes it easy to:
And, on the whole, considering market capitalization can help you spread your risk while maximizing returns according to your risk tolerance.
Q.ai is the trade name of Quantalytics Holdings, LLC. Q.ai, LLC is a wholly-owned subsidiary of Quantalytics Holdings, LLC ("Quantalytics"). Quantalytics offers automated financial advice tools through Quantalytics Investment Advisors, LLC ("QAI"), an SEC-registered investment advisor. QIA’s investment advisory services are ONLY available only to residents of the United States. Disclosures concerning QIA’s investment advisory services are available on its Form ADV filed with the SEC. The content in this newsletter is for informational purposes only and does not constitute a comprehensive description of Q.ai's investment advisory services.