Market Capitalization (explained)

Table of Contents

• Introduction
• What is Market Cap?
• Categorization
• Market cap for Cryptocurrency
• Conclusion

Introduction

In today’s topic we are going to talk about the famous term “Market Cap”, it is mostly needed to know by traders in all sorts or types of investing. By a good understanding what market cap is, and with that knowledge you are going to be prepared to build a balanced stock or crypto portfolio. Using market capitalization, you will be able to show and understand the size of a company which is a really important thing if you are planning to invest in anything. Although it measures the cost of buying all of a company’s shares, the market cap does not determine the amount the company would cost to acquire in a merger transaction.

What is Market Cap?

Market capitalization or market cap stands for the total dollar market value of all company’s shares of stock. It can be calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share. In simple words it refers to how much a company is worth, which is determined by the stock market (total market value of all the shares).

For example, a company with 20 million shares selling for 100$ each, would have a market cap of 2 billion. Using market capitalization to show the size of a company is a great way to determine important characteristics in which you as an investor should be interested. The total market Cap of a company depends from the initial public offering or the so-called IPO. Companies typically issue an IPO to raise capital to pay off debts, fund growth initiatives, raise their public profile, or to allow company insiders to diversify their holdings or create liquidity by selling all or a portion of their private shares as part of the IPO. That means that the company IPO value, for example if set to 50$ million, the initial Market cap would be also 50$ million. The company’s shares and their price on the market are determined by supply and demand. If there is a high demand for its shares, the price goes up, if the potential of the company looks bad, quick and panic selling could drive down the price of its shares to. This should be enough for you to understand what is market cap and how does it work.

The formula:

Market cap is given by the formula MC = N X P

Where MC is the market cap, N is the number of shares outstanding, and P is the market price per share.

For example, if the company has 5 million shares outstanding and the closing price per share is 20$, its market capitalization is then 100$ million.

Categorization

Every company has its market cap, depending from its size and success, companies are divided in three groups:

Large-cap

Mid-cap

Small-cap

Large-cap companies have at least a market cap of 10$ billion or more. Those are successful and well-known companies for their products and offers, usually they have been around for a long period of time. When it comes to investing in companies with large cap, it does not necessarily bring in huge returns in a short period of time, it’s more of a long-term investment. For traders and investors, they represent one of the safest ways to invest their money in. But you should be aware of the fact that your investing funds needs to be high to. Some examples of those companies are: Tesla, Microsoft, Google and similar.

Mid-gap companies have a market cap between 2$ billion and 10$ billion. Those companies that at least are expected to experience growth in the near or far future. That means that they are still in the process of expanding. That means there is a high possibility for growth potential, but also risk, since they are not established like Large-cap companies. Example of a mid-cap company is Ambarella and many more…

Small-cap companies have a market cap between 300$ million to 2$ billion. They are small or medium companies that are new to the industry. They are considered to be higher risk investments because of their youth and size. But they also could sky-rocket the prices of shares with good program. But at the end, they are more sensitive economic slowdowns and crashes.

At the end of the day, small cap and large cap companies offer some advantages and disadvantages. The ones with large cap offer a more secure investment, but on a long run, as also they can get to the point where their growth gets to a maximum, where it can decline over time.

Market cap for Cryptocurrency

For a cryptocurrency like Bitcoin, market capitalization is the total value of all the coins that have been mined. It’s calculated by multiplying the number of coins in circulation by the current market price of a single coin. As same with companies, market cap in crypto can determine the total value of the given coin, for example Bitcoin or another.

The formula is the same like with the normal cap. For example, if the cryptocurrency has 500 thousand coins in circulation and each coin is worth 1$, it’s market cap is 500$ thousand.

The categorization is very similar like in the normal companies. Cryptocurrency are also classified by their market cap into three categories:

Large-cap cryptocurrencies like Bitcoin and Ethereum have a market cap of more than 10$ billion. Like in large-cap companies, investors consider them lower risk investments because of their track-record growth, and they offer high liquidity (meaning they can withstand a higher volume of people cashing out without the price being dramatically impacted).

Mid-cap cryptocurrencies have a market cap between 1$ billion and 10$ billion, the same story goes with them, they offer potential to fast and rapid growth cause of their youth and untapped potential, but also a higher risk of losing your investment really faster.

Small-cap cryptocurrencies have a market cap of less than 1$ billion. They are the most volatile and most sensitive to dramatic swings based on market sentiment. Crypto with the smallest market cap can sky-rocket and turn your life over night, but you will need to be extremely lucky for that.

Conclusion

Understanding and knowing what Market cap is, can be a valuable tool for investing, from evaluating potential investments and risks. Market capitalization is a quick and easy method for estimating a company’s value. This goes for investing in stocks to even investing in crypto as we could see in the text above. For someone who wants to make money from investing, understanding the basics is the first thing you should do, and that’s where the Market cap goes in.