Why is Market Cap Important ?
When you are looking for companies you would like to invest in, make sure you take a look to the market cap and not only to the price per share. We are going to explain you why it is important to see the market cap and how to understand its value.
The market cap represents the share price multiplied by the number of shares outstanding, representing the amount you would have to pay if you wanted to buy all the company’s shares. Besides, the market cap doesn’t represent the real value of a company. Also, the market cap determines in which category of publicly traded company it goes into. Small cap, mid cap, large cap.
How does the market cap works
Let’s see two companies’ numbers with a similar market cap, but different total of outstanding shares.
Company A
Price per share: $10
Outstanding shares: 50 million
Market cap: $10 x 50 million = $500 million
Company B
Price per share: $2
Outstanding shares: 300 million
Market cap: $2 x 300 million = $600 million
At first glance, looking at the price per share, you could think that the Company A is the most valued company. But as we said earlier, it is the market cap which indicates the value. So you wouldn’t have noticed that it is the Company B which is the highest valued one. This is why it is important to watch it when you are looking at companies. If you see a company with a high market cap but low price per share, it means that there are a lot of outstanding shares and in a conclusion, the stock price will be slow to climb. Let’s look at our both companies but this time with the same market cap.
Company A
Market cap: $20 x 50 million = $1 billion
Outstanding shares: 50 million
Price per share: $20
Company B
Market cap: $3.3 x 300 million = $1 billion
Outstanding shares: 300 million
Price per share: $3.3
The market cap also helps investors to compare companies from the same sector. In Money,eh?, we focus on companies with low market caps as they have a lot of room to grow. It is riskier, but higher the risk is, higher the reward is !