Market cap is the total market capitalization of the company.
Public corporations issue shares to raise capital for their business.
There are thousands of such companies listed in the stock exchanges.
The market price for every company's share in the stock exchanges is determined by forces of demand and supply.
Let us assume that Company Z is a public corporation listed in a stock exchange.
The shares of this company are quoted at $20.
This is what a buyer is willing to pay a seller for Company Z shares.
Let us further assume that Company Z has 5 million shares issued and outstanding.
If each share is worth $20, 5 million shares issued by the company, collectively is valued at $100 million.
This is arrived by multiplying 5 million shares by $20 per share.
This may be lower than the capital invested in the company.
Market cap is what the market collectively values the company at a point in time.
All companies are divided into three basic categories.
They are small cap, medium cap and large cap companies.
Companies such as Proctor and Gamble and Banks such as Citicorp are in the large cap category.
Market capitalization allows an investor to determine where the investor thinks and is willing to risk his capital.
My opinion is this.
Large cap companies have been around for a longer time and can face adversities better.
However, growth may be lower.
Small cap companies may have higher growth, but may not be able to face recessionary trends, competition etc.
An investor should also balance his/her portfolio in terms of specific percentages being invested in small, medium and large cap companies.
There are three components of growth that an investor looks at.
Profitable growth of the business is a key component.
The next is the regularity of dividends paid out.
The third component is other things being equal; a business with a lower PE compared to the industry has a higher potential capital appreciation.
A final word of caution; always consult a qualified, trained professional on where to invest.
Articles such as this only would provide general information and is not a substitute for professional advice.