Understanding market capitalisation

If you’re looking to maximise your investments in the stock market, and secure your long-term goals, it’s essential to understand the relationship between company size, potential returns and risk. One major part of this is understanding market capitalisation, or “market cap.” Here’s a brief introduction to the concept.

What is market cap?

Market capitalisation essentially refers to the value of all a company’s shares of their stock. It can be calculated easily, multiplying the total number of outstanding shares by the price of the stock. For example, a business with 20 million shares selling at £100 per share would have a market cap of £2 billion. Market cap can be used by investors to understand the size of one business compared to another. It shows what a business is worth on its particular market, as well as what that market is predicting for the company’s future, as it’s based on what investors are willing to pay for their stock.

Market capitalisationMarket cap and free float market cap

Market cap, as we’ve established, is the accumulated value of all the firm’s shares of a stock. Float, on the other hand, is the number of shares still available for purchase or sale by private investors. What’s known as the “free-float” method of working out market cap doesn’t include shares held by execs, governments and similar bodies. This method is used by some of the world’s most prominent indexes, including the S&P 500.

What impacts market cap?

Unfortunately, there’s no single answer to this question. Major shifts in share value, whether bullish or bearish, could impact it, as could use of warrants and other alterations in the number of shares issued. However, the market cap is not usually affected by stock splits and dividends. Following a split, the price will go down, as the number of outstanding shares will go up. Though the stock’s price and quantity of outstanding shares may change, the business’s market cap will remain constant. This applies to dividends as well. To develop a diversified portfolio of small, mid, and large-cap stocks, you have to spend some time assessing your overarching goals, timescale and risk tolerance.

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