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:
- Stock 1 – Closes at $608.21 on July 10, 2012
- Stock 2 – Closes at $124,985 on July 10, 2012
- 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.
Did this topic ever confuse you?