What is market capitalization . why market capitalization is important and what is its impact of share price?
When deciding to buy a stock, why is it necessary to see how much its market cap is?. How to choose a stock based on it?
Let’s discuss ” What is market capitalization ” in simple language.
Market Capitalization and Why it is Important.
1. What is Market Capitalization / Market Cap :
Market capitalization is the total valuation of that company. on the basis of the price of the current share of a company. and the total number of outstanding shares.
It is calculated by multiplying the existing market value of the company’s shares. with the total outstanding shares of the company.
market cap is one of its most important features. which helps the investor to determine the risk in return and share.
this also helps investors to select stocks that meet their risk and diversification criteria.
For example , if a company has 5 million outstanding shares and the current market value of each share is 100 rupees.
then the market cap of this company will be 500,00,000 x 100 = 500 crores.
By the size of the market capitalization of the stock. the investor can get an idea of what kind of returns can be given on investing in a stock and how much the risk will be on investing.
2. Why market capitalization is important
One common assumption is that the higher the price of a stock the larger the company. However, the price of a stock can tell the actual price of that company incorrectly.
If we look at two big companies, today i.e. on 9th August 2018 , the price of Reliance Industries shares is 1217 rupees and Maruti Suzuki’s share price is 9156 rupees. but the market capitalization of Reliance is 566,406 crores. and Maruti Suzuki’s market capitalization is of Rs 237,738 crores.
If you only compare the stock market price and compare them. then you will find Maruti Suzuki a big company. But when you see market capitalization. you will know that Reliance is a big company.
The classification of companies in different caps also helps the investors. to understand how much the possibility of returns in the company’s stock and the likelihood of risk.
Historically, large or large cap companies are less risky but provide slow growth. while small or small-cap companies have high growth potential, but risks are high. Simultaneously, an investor can also diversify his investment by investing in companies. with different size market capitalization.
How does it affect Share Price :
From a safety point, the size of a company and the market value affect each other. If all the other things are same. large cap shares are considered safer than of small cap stocks.
However, there are more possibilities for growth in small-cap stocks.
Although it is important to look at market cap before investing in any stock. but do not make decisions only by looking at market capitalization .
The value of market capitalization is just one way. to know the actual market value of a company.
As an investor, you need to focus on many other factors. that can help you determine. whether a company has a good investment or not.
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