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What is Market Cap? Market Capitalization Explained - Stock Market Simplified
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What is market capitalization? Market capitalization (market cap) helps us measure the value and size of a company by multiplying its total number of outstanding shares by its stock price.
The price of the stock does not matter because it's arbitrary; it can be anything at any given time. It doesn't tell you how valuable the company is. Also, you can buy fractional shares of a company for a fraction of the price of a whole share, so the price doesn't even matter when buying.
What matters is the market value of the company: market capitalization. Let's break down the phrase.
"Market": a regular gathering where commercial purchases and sales of goods are conducted.
"Capitalization": the provision of capital for a company, or the conversion of income or assets into capital.
So the market capitalization is how much the company is able to convert their assets, its stocks, into capital, money. Market capitalization helps us measure the value and size of a company by multiplying its total number of shares by its stock price.
How do you calculate the market capitalization of a company?
Market cap is total number of outstanding shares * the market price per share.
Because the market price of a stock fluctuates every second, the market cap will, too. However, the daily fluctuations aren't very noticeable unless there's big news that causes the stock price to move dramatically up or down.
When deciding whether to invest in a company, the price for a single share doesn't matter.
- What matters is how valuable all of the company's stock is;
- what matters is its market cap.
Companies can generally be placed into 3 groupings based on their market cap:
- small cap: $300M-$2B
- mid cap: $2B-$10B
- large cap: $10B+
Where can you find the market cap of a company? All brokerages prominently display the market cap of each company under the stats on the stock's page. Robinhood has it right below the fold on their app and website, so just scroll down a little to find it. Otherwise, just google "xyz market cap".
How do I use market cap when making investment decisions? When I invest in a company, I look at its market cap and do some basic math to compare it to its competitors to determine how much more valuable the company can become in the future.
I compare it to companies that are similar size, companies that are smaller, and companies that are larger. I include age/stage of the companies in my comparison to determine how long it'll take the company to reach its larger competitor's market cap, or how much time is feasible for them to reach a valuation that will satisfy my needs.
I'm a growth investor, so I only invest in companies with market caps that I think have room to at least 5X in the next 5, 10, 20, 40 years. I mostly look for companies that can 10X their market cap before I'm 40 so I can retire early. This is an aggressive timeline and approach, but I don't want to retire when I'm 65, 70, or never, so I take more risks than most people.
If the company is a market leader, like Tesla, give more consideration their pace of innovation. What are they doing to increase the value of the company? What do they need to do to 5x or 10x their market cap? Is the world ready for that kind of growth and innovation from this company?
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Get started investing with a free stock from Robinhood:
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DISCLAIMER: This and all of my videos are for entertainment purposes only. My statements are my opinions and should not be accepted as financial advice.
The price of the stock does not matter because it's arbitrary; it can be anything at any given time. It doesn't tell you how valuable the company is. Also, you can buy fractional shares of a company for a fraction of the price of a whole share, so the price doesn't even matter when buying.
What matters is the market value of the company: market capitalization. Let's break down the phrase.
"Market": a regular gathering where commercial purchases and sales of goods are conducted.
"Capitalization": the provision of capital for a company, or the conversion of income or assets into capital.
So the market capitalization is how much the company is able to convert their assets, its stocks, into capital, money. Market capitalization helps us measure the value and size of a company by multiplying its total number of shares by its stock price.
How do you calculate the market capitalization of a company?
Market cap is total number of outstanding shares * the market price per share.
Because the market price of a stock fluctuates every second, the market cap will, too. However, the daily fluctuations aren't very noticeable unless there's big news that causes the stock price to move dramatically up or down.
When deciding whether to invest in a company, the price for a single share doesn't matter.
- What matters is how valuable all of the company's stock is;
- what matters is its market cap.
Companies can generally be placed into 3 groupings based on their market cap:
- small cap: $300M-$2B
- mid cap: $2B-$10B
- large cap: $10B+
Where can you find the market cap of a company? All brokerages prominently display the market cap of each company under the stats on the stock's page. Robinhood has it right below the fold on their app and website, so just scroll down a little to find it. Otherwise, just google "xyz market cap".
How do I use market cap when making investment decisions? When I invest in a company, I look at its market cap and do some basic math to compare it to its competitors to determine how much more valuable the company can become in the future.
I compare it to companies that are similar size, companies that are smaller, and companies that are larger. I include age/stage of the companies in my comparison to determine how long it'll take the company to reach its larger competitor's market cap, or how much time is feasible for them to reach a valuation that will satisfy my needs.
I'm a growth investor, so I only invest in companies with market caps that I think have room to at least 5X in the next 5, 10, 20, 40 years. I mostly look for companies that can 10X their market cap before I'm 40 so I can retire early. This is an aggressive timeline and approach, but I don't want to retire when I'm 65, 70, or never, so I take more risks than most people.
If the company is a market leader, like Tesla, give more consideration their pace of innovation. What are they doing to increase the value of the company? What do they need to do to 5x or 10x their market cap? Is the world ready for that kind of growth and innovation from this company?
-----------------------------------------------------
Get started investing with a free stock from Robinhood:
-----------------------------------------------------
DISCLAIMER: This and all of my videos are for entertainment purposes only. My statements are my opinions and should not be accepted as financial advice.
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