# A Company’s Stock Price May Have Very Little to do With The Size of Company

I think there is this common misconception that must be addressed for those that don’t have any interest in “the market.”  A Company’s stock price on a particular day does not provide information in of itself of the size of the company.  An easy example:

1. Stock 1 – Closes at \$608.21 on July 10, 2012
2. Stock 2 – Closes at \$124,985 on July 10, 2012
3. Stock 3 – Closes at \$648.65 on July 10, 2012

Which Company is “worth more”? If you guessed Stock 2 or 3 you are wrong.

• Stock 1 is Apple – One of the largest (if not the largest) company in the world in terms of market cap
• Stock 2 is Berkshire Hathaway – Despite being infinitely more expensive to buy one share the company is worth less than half of Apple
• Stock 3 is Priceline – Priced more than Apple PCLN is less than one tenth of the size

How could any of this make sense?

## What is a Company’s Market Capitalization?

Investopedia provides a good definition of Market Capitalization,

The total dollar market value of all of a company’s outstanding shares. Market capitalization is calculated by multiplying a company’s shares outstanding by the current market price of one share. The investment community uses this figure to determine a company’s size, as opposed to sales or total asset figures.

So keeping with our example above,

• Apple with a stock price around \$600 has a market cap of over \$563 Billion
• Berkshire Hathaway with a stock price of around \$125,000 has a market cap of about \$205,600,000,000
• Priceline with a stock price of about \$650 has a market cap of about \$31 Billion

You can buy a share of Facebook for around \$30 bucks but the company is valued at about \$100 Billion!

## Market Cap and Investing

When investing there are distinctions between market cap and investment groups:

• Large Cap: \$10 billion plus
• Mid Cap: \$2 billion to \$10 billion
• Small Cap: Less than \$2 billion

It always amazes me that a company worth less than \$2Billion is considered “small” lol.

Just like all topics of value and worth just because something is expensive doesn’t mean it is a good buy.

Did this topic ever confuse you?

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### 6 Responses to A Company’s Stock Price May Have Very Little to do With The Size of Company

1. I agree with you – I wish I had a “small cap” business. haha. The stock market is an interesting system.

• Evan says:

Seriously! Even a tiny publicly traded company on the pink sheets is large in terms of market cap (but maybe not profit lol)

2. Jenna says:

Ha! Small size business, but it’s publicly traded. Anything that is publicly traded is big in my mind.

• Evan says:

Big yes, but maybe not profitable. There are billion dollar companies out there with zero profit.

3. I agree with Jenna. Small to us but they are publicly traded which is quite a feat. Definitely good information for those that don’t know about market capitalization.

• Evan says:

I think Market Capitalization and stock price are often confused