Market Capitalization represents how much someone would pay for a company if they were to purchase 100% of the shares at the current share price. In essence, it is public opinion of a companies net worth. The metric does not represent the true value of the company (profits, product position etc..) nor does it represent a company whose product has taken off but their reputation has not yet caught up.
Market cap provides a starting point for evaluating whether or not you want to buy stock in a company. Use the market cap information to compare two or more companies of similar size when evaluating a company. To calculate, you multiply the total number of outstanding shares by the current stock price. This information is readily available at the company’s web site or on free financial websites such as Google Finance or Yahoo Finance.
Since many companies have a dominant share holder, many stock market indices adjusts the market cap by calculating it on a free float basis (number of share available for public trading). Free float is an important issue for smaller companies which commonly have several strategic shareholders and where directors can be significant shareholders.
Small cap stocks range from $400 million to $2 billion, middle market ranges from $2 billion to $10 billion and large caps are $10 billion.
Small cap stocks have the potential to rise at a rapid pace as they increase their revenue versus the more established large caps which have a lower growth potential. Keep in mind that it is much easier to increase revenues starting at a base of $7 million versus a base of $500 million. However, small caps tend to have a less seasoned management and are more likely to run into trouble.
When you try to figure out which market cap fits your style, remember the ride of a growth stock can be exciting one minute and depressing the next when the growth slows or even worse, it tanks. The era of the dot com is a good example.
