Friday, February 24, 2012
A stock's market capitalization (market cap) is computed by multiplying the stock price by the number of shares outstanding. So, if a stock's price was $50 and there were 10 million shares, the stock's market cap would be $500 million.
Stocks can be separated into 4 groups, according to their market capitalization:
1. micro caps - below $300 million
2. small caps - between $300 million and $1 billion
3. mid caps - between $1 billion and $5 billion
4. large caps - over $5 billion
I talk in more detail about market cap analysis in my book Stock Trading Riches because it's important for investors to allocate their portfolios among all market caps to provide diversification, avoid cyclical returns, and take advantage of "regression to the mean" (e.g. one market cap segment outperforms another, but then they converge).
Market cap is calculated by multiplying the number of shares outstanding by the share price. For example, if stock ABC issued 6 million shares, and the price of each share is $6, then ABC has a market capitalization of $36 million.
In general, micro caps are new companies that are just hitting their stride. Small caps tend to have their infrastructure in place and are in growth mode. Mid caps are big regional or national companies. Large caps tend to be established multinational corporations.
Stocks within each market cap share important characteristics in the areas such as growth rate, risk, dividends, visibility, and international exposure.