Market CapitalizationMarket Capitalization is the value that the stock market places on a company. It is the value of the company as determined by the supply and demand of the market place. The value fluctuates on a minute-by-minute and day-by-day basis as the price of the stock changes value. When you stop to think about it, it really doesn't make much sense that the value of company would change from minute to minute, but that is exactly what happens when the price of the stock fluctuates in the stock market. It is this short term fluctuation in value that makes some people think that investing is gambling. It only becomes gambling when you try to take advantage of short-term movements in the price of a stock. Buying for the long-term is investing.Market capitalization is usually shortened to "market cap" and is defined as
Companies are commonly classified as small, medium, and large depending upon their market caps. The dividing points are usually one billion and five billion dollars in market cap. There are, however, extrems in both directions. Microsoft (MSFT) has the largest market cap. At its high price in February of 1999, Microsoft's market cap exceeded $400 billion. On the small side is a company like ACI Telecentrics (ACIT) which has a market cap of just over a million dollars. This classification is conveniently summerized below:
Of course, these dividing points have increased over time as the stock market has appreciated. It is also important to note that the dividing points are completely arbitrary and will vary depending upon who is doing the defining. That is, each mutual fund will define small, medium, and large cap stocks slightly differently, and one fund might call stocks greater than $10 million to be large cap stocks. Company SizeNote that, market cap is not an accurate way to describe the size of a company. Small companies can have a large market cap if the market is optimistic about them, and similarly, large companies can have a small market cap if the market is pessimstic about them. The best measure of company size is annual sales. This is dicusssed in more detail in the section on comparables. Two companies which illustrate the different perceptions of the market are Amazon.com (AMZN) and Cannon (CANNY). As of February 11, 1999, both had market caps of $17 billion dollars; however, Amazon had sales of only $610 million while Cannon had sales of $24.5 billion or forty times greater than Amazon. That is, Cannon is forty times larger than Amazon. The difference is that Amazon is growing several hundred percent per year, and Cannon is a lumbering giant growing less than ten percent per year. Even more azmazing is that Cannon had annual profit of five billion dollars or nearly ten times the total sales of Amazon. Of course, the stock market is beting that Amazon, with a growth rate of greater than 100%, will rapidly catch up or pass Cannon. If Amazon can grow sales at 100% per year, it will take nearly five years to equal Cannon sales. If it can grow 200% per year, Amazon can catch up to Cannon in three years. (See discussion of time value of money.) Of course, there is the issue of profit. To have value, a company must make a profit, which Amazon has yet to do. A good source of basic financial information about companies is the Yahoo web site. For example, check out the following web pages: |