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What is Market Cap? How to Find the Value of a Company - YouTube
Channel: The Motley Fool
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hey there I'm Dylan Lewis from The
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Motley Fool in this FAQ video we are
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breaking down market capitalization and
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explaining how investors can use it to
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help them identify companies to invest
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in the finance and investing industry
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loves to come up with more complicated
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ways to say pretty simple things and
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market capitalization is a perfect
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example of that you'll often hear it
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abbreviated as market cap and really all
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this number does is tell you what a
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publicly traded company is worth to find
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it just take the number of shares of
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stock a company has issued and multiply
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it by the current market price of the
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stock so if a company has issued a total
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of 20 million shares and each share is
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valued at $20 then the company's total
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market cap is 400 million you can do
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this math on your own but if you go and
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search any publicly traded company the
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market cap will be listed right there
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saving you the hassle market cap is one
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of the best measures of a company's size
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and it can tell you a lot about what to
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expect if you're buying a stock in
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general large companies tend to have
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more stable and mature businesses and
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having proven themselves over time and
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whether difficult business conditions
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they're able to emerge even stronger
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however the growth prospects for these
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large companies tend to be more limited
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because they've already grown so much
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and sees so much the opportunity in
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front of them
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by contrast smaller companies have a lot
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more room to grow however smaller
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companies tend to be riskier and younger
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with business models that haven't been
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proven out over time their odds of
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failure are significantly higher than
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those of the more stable large companies
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here's a quick breakdown of the way
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market capitalization ranges are often
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segmented and discussed within the stock
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market
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we're gonna explore these categories
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more in depth but first let's just
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appreciate how wide a spectrum we're
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working with here a large cap company
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could be 200 to 4,000 times the size of
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a micro cap business and some mega cap
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companies are worth over a trillion
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dollars large cap stocks have market
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capitalizations of 10 billion dollars or
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more most of the best-known companies in
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the world are large caps and some
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investors break out stocks with market
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caps of more than 200 billion into a
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separate category mega cap stocks most
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large cap companies have mature
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businesses and generate substantial
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amounts of revenue they often earn
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significant profits and have a
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considerable market share within their
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industries making them leaders in their
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fields there are also more likely than
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smaller companies to pay sizable
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dividends to their shareholders because
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their businesses tend to produce greater
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amounts of available cash but large cap
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companies have already gone through
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their period of maximum growth as a
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result even successful large cap
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companies that pay healthy dividends and
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whose shares have gone up in value
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consistently won't always be able to
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match the massive returns that smaller
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companies can achieve the trade-off is
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that investors enjoy more stability and
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often market leading companies continue
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to win
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they might just not put up insane growth
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rates mid cap stocks have market caps in
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the range of 2 billion to 10 billion
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dollars occupying the middle ground
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between large and small cap companies
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mid cap companies are large enough to
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have made considerable progress in
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building up successful business models
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and that gives their investors some
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stability and protection against future
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challenges that the company will face
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however they're small enough that they
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still give investors a longer runway for
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future growth than a large cap stock
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that said mid caps also face the
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difficult task of trying to catch up and
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surpass their larger rivals in their
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industries and they often don't have as
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many financial resources to do so it's
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important when investing in mid cap
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stocks to know their history some mid
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cap companies are still in their high
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growth phase while others have reached
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their full potential in a relatively
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small niche industry of limited size
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still others are older companies that
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used to be large caps but have had their
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businesses lose steam any of these can
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be good investments under the right
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circumstances but they have very
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different characteristics in terms of
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growth potential dividend
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and valuation if you're looking in the
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mid cap space ideally you're buying
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companies that are still posting
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impressive growth and gaining market
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share those are the kinds of businesses
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that ultimately become large cap
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companies and reward shareholders along
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the way small cap stocks have market
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capitalizations of between 300 million
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dollars and 2 billion dollars
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some people also include within this
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category even smaller companies with
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market caps of 50 million to 300 million
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while others put those tiny stocks into
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a separate group called micro cap stocks
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small cap companies tend to be younger
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than large caps or mid caps and they
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also have a much shorter operating
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history as a business small caps often
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have considerable growth potential but
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investors and small caps to face a lot
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more uncertainty about their future in
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many cases small caps have to upend much
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larger competitors in order to stake
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their claim within a given industry and
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for every small company that succeeds
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many fail over time small cap stocks
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have historically produced higher
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average returns than large cap stocks
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but their performance has been more
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volatile along the way that requires
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small cap investors to have a greater
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risk tolerance than those who
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concentrate on larger stocks those with
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long time horizons can typically weather
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the ups and downs of small cap stocks
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and therefore have a better chance of
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enjoying the reward of greater returns
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most investors find that having a
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diversified portfolio that includes
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large-cap mid-cap and small-cap stocks
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lets them tailor their desired return
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and risk levels to their specific wishes
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if you want your portfolio to be more
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stable then you want a larger allocation
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to large cap stocks those who want
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greater amounts of current income will
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also typically gravitate to large cap
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stocks because they tend to be the
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dividend payers by contrast if you don't
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need much income and your primary goal
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is to have your portfolio grow as much
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as it can over many years then you'll
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likely want to make larger investments
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in small and mid-cap stocks if market
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cap helps us categorize companies and it
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also helps us compare them apples to
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apples say you have two companies Dylan
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enterprises and Lewis LLC Dylan
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enterprises has a stock price of $30 and
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shares of Lewis LLC trade for $20 now
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which one is the more valuable company
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you can't--no without also knowing how
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many Shea
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each company has outstanding say Dillon
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Enterprises has ten million shares
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outstanding and Lewis LLC has 20 million
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shares outstanding Lewis LLC is actually
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a bigger company even though its share
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price is lower it just happens to have
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sliced up ownership of the business more
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ways
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that's why market cap is a far better
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indication of where a company sits than
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share price and why it's important to
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know the size of a business you're
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buying before you buy it if you're
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looking for more awesome investing
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fool on
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