What is Market Cap?

Market Cap short for Market Capitalization and also referred to as the total market value of a company is figured by taking the current price of each share and multiplying it by the total of common shares currently outstanding. In other words you take the price of the stock times the number of stocks that have been made available for purchase. The market cap of a company will differ each day as the price of stock changes each day. Market cap is one of several ways used to estimate the value of a company.

It is not true that the price of stocks shares conveys the relationship between other stocks. The price of shares means nothing to those doing a fundamental analysis. The values of stocks changes constantly and different companies have a different number of shares so this is not an indication of a company's value. A market cap is used to determine the value of the company in question. In other words the company's value is what the entire company would sell for should it be put on the market for sell.

A market cap gives you a place to begin when determining the value of a company. The placing of companies into different categories of market cap help to estimate the growth and potential risk involved. Terms such as small cap, mid cap and large cap may be used when figuring the market cap of things such as companies' mutual funds. A higher price for stock does not indicate the size of a company. Companies with a large market cap grow slower and present less risk while the opposite is true of companies with a small market cap.

There is no set way to determine the different market caps although there are some standards for figuring them that are widely accepted.

MEGA CAP
The mega cap features companies with more than two hundred billion dollars as there market cap. These are normally large publicly traded companies such as Wal-Mart and Microsoft. These are generally industrial leaders and very few companies fall into this category.

BIG/LARGE CAP
These are companies that go from ten billion to two hundred billion for there market cap. Yahoo and other well known companies fall into this category. These are generally considered to be fairly stable and often called blue chips.

MID CAP
This is a range of two billion to ten billion dollars for a company's value. These are more of a risk than larger or mega cap companies. Mid caps are made up by growth stocks in a large part. These may not be leaders in their industry but they are on the way to being leaders in the industry.

SMALL CAP
These are younger companies that have not yet made significant profits compared to other companies. They have a market cap somewhere between three hundred million and two billion dollars. They don't have as long of a track record as mid or mega cap companies do but they have a possibility of greater profits. There is a larger risk.

MICRO CAP
These are mostly penny stocks. The market cap for these companies ranges from fifty to three hundred million. Detailed research is required before investing in these since the chances for profit are as great as the chances for losing the investment amount.

NANO CAP
These are companies with a market cap that is less than fifty million dollars. They are the riskiest investment. The chances of making money off the investment are low. They are usually traded on pink sheets or OTCBB.

This market cap ranges will all vary depending on the markets performance in its entirety. Market cap will not help much if investing in stocks but is essential to mutual fund investors.

Sources:
http://www.yyconsulting.com/taxglossary
http://www.wisegeek.com/what-is-market-cap.htm
http://stocks.about.com/od/evaluatingstocks/a/stocksmarketcap.htm
http://www.invetopedia.com/articles/basics/03/031703.asp