One of the most important things to look at when investing in a stock is the market cap of a particular company. You can often base your expectations on the potential long term return that you will get based on the market capitalization. For example, it is highly unlikely that Exxon Mobil (XOM) will double in value with its $420 billion dollar market cap. Exxon has the largest market cap in the United States. Meanwhile a small cap company could have the chance to become a multibagger over time.
What is a stock’s market cap?
Market cap is short for a stock’s market capitalization. A stock’s market capitalization is the market value of all of the shares of a company’s share. The market cap of a stock is found by taking the market price of a stock and multiplying it by the total number of common stock shares outstanding.
Large cap stocks
Large cap stocks are companies that have market caps greater than $10 billion dollars. These are the largest companies in the United States and they often have significant sales revenue, earnings, and cash flows. These stocks are more likely to pay dividends and they have growth rates that are moderate to normal. Large cap stocks are most appropriate for defensive investors not seeking to take on a lot of risk. Their large size makes them safer investments than other stocks.
Mid Cap stocks
Mid cap stocks are companies with market caps that range from $1 billion to $10 billion dollars. These are the companies that offer investors both growth and a decent level of safety. Mid cap stocks are not as risky as small caps and not as safe as large cap stocks. They are right between both asset classes. These stocks are appropriate for investors looking to take on more risk and achieve higher levels of growth than most large caps offer.
Small Cap stocks
Small cap stocks are the market’s biggest growth opportunities. These stocks can either make you a whole lot of money or cost you a whole lot of cash. Small cap stocks have market caps below $1 billion dollars. There are some small caps so small that they have sales figures in the hundreds of thousands. A company like Under Armour is an example of a small cap stock that has been able to grow its way out of small cap status.
There are a lot of factors to weigh when stock investing and the market capitalization is one of the areas that should be considered.
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