By: Revanche

Recognizing Market Capitalization In Stocks

February 3, 2010

Today we have a guest post from Silicon Valley Blogger (SVB) of The Digerati Life, my Northward neighbor and savvy investing problogger.  Please make her welcome!

The Digerati Life is a site that covers financial topics, from investing and budgeting to debt management. Check the site for online stock trading promotions, including this OptionsHouse promotion code page for cheap brokerage commission rates.

When a stock broker mentions growth investing, they are referring to companies that show a lot of future potential. To understand growth investing versus any other type of investing, it will also be helpful to understand market capitalization. The market capitalization figure will tell you the size of a company. I look at growth investing a little differently than what you’ll find from online definitions of the term. To me, you must figure the company’s market capitalization in order to know its place in its industry.

Many investors probably don’t pay much attention to market capitalization, but they all should. The market capitalization figure should be one of the first numbers you look at when analyzing a company. Companies can be divided into groupings by their market capitalization. A large cap company is greater than $10 billion, mid cap is $2 to $10 billion, small cap is $300 million to $2 billion, and there are smaller companies less than $300 million. This figure is the result of multiplying the price of a single share of stock by the shares which the company has issued outstanding. That is the equation to determine market capitalization if you don’t have a listing for it already on your information source. You should do the calculation anyway, because then you’ll know your stocks’ value, for sure.

Market Capitalization = Price of Single Share of Stock x Shares Outstanding

Now stocks can also be categorized as either growth or value stocks. A high growth company can have any kind of capitalization, whether it be micro cap, small cap, mid cap, or large cap. The growth part of the analysis has to do with potential. How much market share does the company hold in its industry? To figure market share of an industry, you’ll have to get the total market capitalization of the companies in the industry you are analyzing. Then divide each one into a hundred to figure its percentage share of the market. This figure will also give you a chance to see potential growth for your company. A company often grows by taking market share away from other companies.

Total Industry Market = Market Cap A + Market Cap B + Market Cap C
Market Share in % = Market Cap (A, B, or C) /Total Industry Market

All the calculations and rules of thumb in the world won’t help you identify a growth stock if you pick the wrong industry. You have to ask yourself, what kind of money is this company making right now, what could it be making ten years from now, and then look at the industry your company pick is in… is that industry in decline or not? In general value investors look for companies in established industries with an undervalued stock price. Growth investors look into emerging and presently hot industries for a company that is about to take off or has the potential for high growth in the future. In value investing, your gains are from buying cheap and selling at reasonable prices. In growth investing, your gains are made by buying at a reasonable prices and then selling at even higher prices. Pay attention to market capitalization figures, and the position of the industry your company is in, and that will make you a better investor.

5 Responses to “Recognizing Market Capitalization In Stocks”

  1. Melissa says:

    On Market Capitalization: You mentioned,

    “A company often grows by taking market share away from other companies.”

    Is this the only way a company often grows?

    I’m reading “The Handbook of Financing Growth” and the author, Kenneth H. Marks offers a detailed discussion about how I should position my company better for value before the transaction.

    A good friend of mine is helping me understand a lot of my questions, but I also wanted someone else’s take on it too.

  2. Melissa says:

    I think there is something wrong with the linking on this page. I don’t think I typed it wrong, so I will try adding it again here. Kenneth H. Marks of, The Handbook of Financing Growth.

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