Market Capitalization Explained
Whether you’re a trader or simply a stock market fanatic, knowing a company’s value is essential to your trading strategy and can help you develop a nuanced perception of the overall market. This is where market capitalization comes into play. In this article, we’ll look into what market cap means, how it’s calculated, what affects it, and why it’s important. In addition, we’ll mention some of the companies with the biggest market capitalization as of the time of the writing.
What is Market Cap
Market capitalization or “market cap” is the total value of a publicly-traded company's entire shares of stock. Investors can use a company’s market capitalization to evaluate its value and size instead of using the total sales or asset figures. Furthermore, to calculate a company’s market cap one can multiply the company’s total shares by the company's current market price per share. For example, if a company’s share price is $10 and its total number of outstanding shares is 500 million, then its market capitalization would be $5 billion. (Source:Investopedia)
How to Calculate the Market Cap
Furthermore, market capitalization does not solely pertain to companies, it can also be applied to other financial instruments like Cryptocurrencies and Commodities. Let’s take bitcoin’s market cap as an example, a cryptocurrency like Bitcoin’s (BTC) market capitalization would be the total number of mined Bitcoins multiplied by the price of a single Bitcoin. In addition, the market cap of a cryptocurrency would be calculated in a similar manner to a company’s market cap by multiplying the price of a single Bitcoin by the total number of mined coins.
Types of Market Capitalization
Companies’ and financial assets’ market cap can be segmented into 3 main categories or sizes; small-cap, medium-cap, and large-cap companies. Big tech companies like Microsoft (MSFT), Apple, Alphabet (GOOG), and NVIDIA (NVDA) are considered some of the biggest market cap stocks in the S&P 500 Index (USA 500) while companies like American semiconductor design company Ambarella (AMBA) are categorized as mid-cap stocks.
Why Is Market Cap Important?
Market capitalization is important for a variety of reasons. First, it’s a widely-acceptable way to measure a financial instrument’s value. This means that by looking at, for instance, Apple's (APPL) market cap individually one can assess if it's worthy of trading or investing. When looking at a company’s market cap in comparison to another, one can plan their trading strategy accordingly and weigh out which share is more worthy of trading CFDs on and when to buy or sell a certain share CFD. The same thought process can be adopted when comparing different Cryptocurrencies and Market Indices.
What Affects a Company’s Market Cap?
There are various factors that come into play when talking about market capitalization. Below, are some of the variables affecting companies' market cap.
Industry Demand
How needed and attractive an industry is can affect how the company is valued. If a company operates in a hot industry it will likely be more in-demand and thus would be more valuable to investors. As of the time of this writing, companies involved in AI and healthcare are considered those belonging to the “hottest” industry sectors. Accordingly, supply and demand disruptions like those experienced in May in Tesla’s Shanghai factory due to renewed COVID restrictions, can lead to companies losing their value. In May, for example, Tesla lost about $30 billion in market capitalization. (Source:Forbes)
General Economy
In times of economic uncertainty and turmoil, like the one that has been prevailing in markets over the globe recently, investors' appetites tend to dwindle and companies that are considered high-risk assets tend to underperform, thus, they become less valuable. In the past few months, for instance, many big tech companies lost market capitalization due to surging inflation and higher interest rates. This is because technology stocks are deemed susceptible to negative market trends since they are heavily reliant on future cash flows. As a result, companies like Coinbase (COIN), Tesla (TSLA), NVIDIA, Microsoft, and Intel (INTC) have taken the decision to lay off some of their employees and put a halt to the hiring processes in June.
Market Sentiment and Perception
The way companies perceive the market can impact the value of the company and its entire industry. When a risk-averse mood takes over the market, companies that are not categorized as safe-haven stocks tend to depreciate in their value as investors tend to go for more safe-haven investments like Walmart (WMT), Pfizer (PFE), and Johnson & Johnson (JNJ).
This Year’s Biggest Companies by Market Cap
As of the time of the writing, some of the companies with the biggest market capitalization belong to the tech, pharma, and energy sectors and include Apple, the world’s largest company by market cap of $2.224 Trillion, ExxonMobil (XOM), Microsoft, Amazon, Alphabet, Tesla, Meta (META), NVIDIA, and AbbVie (ABBV) which is valued at $269.46.
While these companies may have it “easy” compared to others currently, the market is known for its volatility, and the added uncertainty that looms all over the world at present can further affect and shift its current trajectory. Therefore, nothing is certain and market capitalization is dynamic.
