If you’re just starting to build your own investment strategy, you’ve surely come across the term “market cap”. The stock market niche is definitely full of very specific terms, and the respective numbers or percentages given to some of them can be really important in order to understand a company’s future and its potential value.
Market cap – short for market capitalization – is a metric that measures the total dollar value of a company’s shares of stock. It’s a relatively easy metric to calculate and offers some good insight about the actual size of a company, NFT, cryptocurrency, etc., but not necessarily about its actual value. We’ll get a bit more into that later.
The market cap is first established through an initial public offering (IPO). Before the IPO, an assessment is made by investors and shareholders in order to determine how many shares of that company will be issued and at what price they will be sold.
Once the IPO value is settled, the investment bank decides on how to divide the number of shares that will be issued and share price based on that value.
For instance, if you have a new company that is valued at $20 million, investors may choose to issue 1 million shares at $20 each or 100,000 shares at $200. Either way, the initial market cap is still $20 million.
The market cap metric consists of one simple multiplication:
Share price x Outstanding shares = Market Cap
For example, let’s say you come across a fractionalized NFT that has 1,000,000 outstanding shares that are selling for $50 each. That means the market cap for that NFT will be
$50 million.
In the crypto scope, the logic is the same:
Token price x Total tokens = Market Cap of a crypto asset
Cryptocurrencies can issue extra coins or tokens over time. Because of this, people investing in crypto assets also tend to calculate the diluted market cap. While the usual market cap makes its calculation based only on the coins currently in circulation, the diluted value – A.K.A. fully diluted valuation – is the total market capitalization based on all the coins ever created.
Knowing the market cap of companies can help you categorize them and organize your investments based on that. Keeping your investment portfolio diversified is extremely important in order to prevent losses and try to maximize your profits.
The categorization by market cap value allows you to identify companies’ sizes and distribute your funds amongst them in the best way possible. There are three categories in which you put a company’s market cap in.
These companies have a market capitalization of around $10 billion or more. Goes without saying that these are the “big boys” in the market, companies that often have been around for quite some time and are well known for providing good-quality services/products and are also in very comfortable positions regarding their industry niche. These are extremely steady enterprises, and although investing in them may not be so profitable within short periods of time, it certainly is in the long run.
Examples: Microsoft, Apple, Meta, Amazon.
They generally have a market cap between $2 billion and $10 billion. These companies are also established, and are going through exponential growth – or at least are expected to be in the near future. At this particular stage, we can say that this is when a company has to prove itself in order to rise to its potential peak. Mid-cap companies are attractive due to their rapid growth and potential to generate profits for shareholders in not so long periods of time, although they don’t offer the same stability as large-caps.
Examples: Ambarella, American Eagle, Stitch Fix.
These are companies with a market cap between $300 million and $2 billion. These are relatively young companies, often rising up in emerging industries, such as tech, eSports, cybersecurity, etc. Small-cap enterprises are naturally more volatile and consequently more risky to invest than mid-caps or large-caps. They are often amidst tough competition with companies with similar proposals. However, investing in such a company in its early stages can be extremely profitable if the business rises to glory and reaches large-cap proportions.
Examples: Office Depot, Bed Bath & Beyond, Perion Network.
For the market cap of a company to be altered, the stock prices or the number of actual outstanding stocks must change. Common activities made by a company that change market cap are issuing new shares or repurchasing them.
Also, an investor exercising a big number of warrants can significantly increase the number of outstanding shares, therefore diluting their value and affecting other shareholders in a negative way, as their shares turn less valuable.
A company issuing dividends to its shareholders can also increase the number of outstanding shares, however on a way less significant scale.
As we’ve said in the beginning of this article, market cap doesn’t necessarily reflect a company’s actual value. Share prices and the number of them outstanding in the market are not enough data to properly calculate a company’s worth. It can tell a lot about their size and how much people are actually willing to pay for some shares, but not much beyond that.
Besides, shares from a company can often be overvalued or undervalued, so that’s another reason for not leaning into the market cap for a proper summary of value.
You may notice that the one huge element is lacking from the usual market cap metric: debt. The most popular metric that includes the debt factor and properly measures a company’s total value is the enterprise value.
The enterprise also includes the market cap value and is calculated as follows:
EV = (Market Cap + Total Debt) - Cash
In this formula, Total Debt is seen as the sum of all the short-term and long-term debts accumulated by a company. Cash is the sum of all the liquid assets of the company.
Two companies may have a close to equal market cap but have very discrepant enterprise value, all of this happens because liquid assets and debts come into account.
This formula changes the perspective on the company’s overall scenario and also provides an approximate value for a takeover bid, which is the price one company offers in order to buy another company.
You may have heard about such a term recently, as Elon Musk notably made a $44 billion takeover bid in order to buy Twitter.
Lucky for you, AssetDash helps you to keep track not only of the current market cap for each one of your shares, may they be in cryptocurrencies, NFTs or the usual stock market, it also offers plenty of other data regarding your investments across multiple platforms.
Our app will provide you with data of the overall performance of your shares, percentage of change of holders, and even give you floor prices on all of your acquired NFTs.
The AssetDash can track all of your shares across platforms and help you to analyze if you need to invest more in small-cap, mid-cap or large-cap companies.
If you want to learn more about AssetDash and all of its features, you can check out this article on our top features.
