Market Capitalization Defined:
Market Capitalization, often referred to simply as “Market Cap”, is a mathematical equation that determines a company’s size. It’s calculated by multiplying the total number of outstanding shares by the current market price of one share. The size of a company often allows traders and investors determine the risk associated with a particular trade or investment. Companies with a low market capitalization, referred to as a “Micro Cap” or “Small Cap”, have a market cap in the ballpark of $50 million to $3 billion. These stocks can have a tendency for being volatile with relatively low volume, and thus, are considered more risky. Companies with high market capitalization, “Mid Caps” or “Large Caps”, can have market capitalizations in excess of $10 billion. Large Caps are companies like Amazon, Microsoft, Alphabet, etc. These are extremely well-known, highly-liquid companies with proven business models and great track records for rewarding investors over the long term.
Each point on the scale from Micro to Large Cap has its pros and cons. While Large Caps have usually been around for a long time in established industries, you won’t often see large returns in relatively small periods of time. Over the long-run, however, they can generate shareholder value in the form of dividend payments and steady increases in share value. Small caps, on the other hand, aren’t established companies, probably have questionable balance sheets (ex. high debt, no profit, etc.), yet they have the potential to generate huge returns in the short term if the right situation occurs. These huge moves in small “no name” stocks can happen very quickly due to the right technical setup (ex. Short Squeeze), a fundamental catalyst (ex. Partnering up with a Large Cap company like Amazon), or a combination of both. While a business deal with a small company may not mean anything to a behemoth like Amazon, it means the world to that small company, and as a result, can send the stock price skyrocketing. This is why the Small Cap arena lures in quite a few short term traders looking to capture big profits in short periods of time.
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