# Market capitalization defined

Investopedia

02/28/19

You often hear companies or different mutual funds being categorized as small cap, mid cap or large cap. But what do these terms really mean? The "cap" part of these terms is short for capitalization, which is a measure by which we can classify a company's size. Although the criteria for the different classifications are not strictly bound, it is important for investors to understand these terms, which are not only ubiquitous but also useful for gauging a company's size and riskiness.

### Calculating market cap

Market capitalization is just a fancy name for a straightforward concept: it is the market value of a company's outstanding shares. This figure is found by taking the stock price and multiplying it by the total number of shares outstanding. For example, if Cory's Tequila Corporation (CTC) was trading at \$20 per share and had a million shares outstanding, then the market capitalization would be \$20 million (\$20 x 1 million shares). It's that simple.

### Why it's important

A common misconception is that the higher the stock price, the larger the company. Stock price, however, may misrepresent a company's actual worth. If we look at two fairly large companies, IBM (NYSE:IBM) and Microsoft (Nasdaq:MSFT), we see that at as of March 18, 2009 stock prices were \$91.75 and \$16.75 respectively. Although IBM's stock price is higher, it has about 1.34 billion shares outstanding, while MSFT has 8.89 billion. As a result of this difference, we can see that MSFT's market cap of \$148.91 billion is actually larger than IBM's \$122.95 billion. If we compared the two companies by solely looking at their stock prices, we would not be comparing their true values, which are affected by the number of outstanding shares each company has.

The classification of companies into different caps also allows investors to gauge the growth versus risk potential. Historically, large caps have experienced slower growth with lower risk. Meanwhile, small caps have experienced higher growth potential, but with higher risk.

### Different types of capitalization

While there isn't one set framework for defining the different market caps, here are the widely published standards for each capitalization:

Remember, these ranges are not set in stone, and they are known to fluctuate depending on how the market as a whole is performing.

### Conclusion

Understanding the market cap is not just important if you're investing directly in stocks. It is also useful for mutual fund investors, as many funds will list the 'average' or 'median' market capitalization of its holdings. As the name suggests, this gives the middle ground of the fund's equity investments, letting investors know if the fund primarily invests in large-, mid- or small-cap stocks.

### Intro to asset allocation

Most investments don’t move in the same direction at the same time. If you hold different types of investments, your winners and losers may balance each other out, resulting in less volatility in your portfolio.

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### What is a dividend?

A dividend is a payment made by a corporation to its stockholders, usually out of its profits. Dividends are typically paid regularly (e.g. quarterly) and made as a fixed amount per share of stock.