Trading Basics: What is Stock Market Capitalization?

If you’ve decided to unlock the full potential of your money with a trading account in the stock market, then you’ll have a long path of learning ahead of you. Even the best investors in the world believe that the path to success is built on constantly developing new skills and knowledge. One of the first things you’ll need to do is as you make your way into the industry, is become familiar with some of the common terms that are thrown around by brokerages and other competitors. Investing in stocks is difficult enough without finding yourself wondering what different terms and phrases actually mean. Today we’re going to introduce you to the basics of trading, by explaining what stock market capitalization is.

Understanding Capitalization in Stocks

If you’re still in the early stages of your educational journey, and you haven’t got to the point where you’re asking what the top penny stocks are yet, or how you can start day trading, then you might want to know what it actually means to own a stock. These securities are basically equity investments that represent a percentage ownership in a company. When you buy one of these assets, you gain legal possession over a specific business. Although you might not own a large share of the company, you still make money whenever the value of the enterprise rises. Corporations issue these assets to raise money for investment.

You profit as a trader when the price of your shares increase to numbers higher than what you paid when you initially got involved. Some people hold onto their securities for years, while others try to move them as quickly as possible. Because the marketplace works like an auction, prices go up and down when the number of buyers or sellers for your business increases. A stock market’s cap, or capitalization refers to the sum of the shares available, multiplied by their price.

Defining the Market Cap

If the cap for your business was $50 million, this would potentially mean that there were a million shares available in total, all costing around $50 each. This figure might seem strange, but many experts agree that it has more meaning overall than the price of the share. That’s because it allows you to evaluate the company in the context of other companies that are a similar size. When you can see how much a company costs compared to the other businesses and their caps, you can decide when it might be a good idea to get involved with a new venture, as well as when it may be time for you to cut your losses and sell. In the trading landscape, companies often get segmented or grouped according to their cap. For instance, if you’re investing in a small-cap company, you’d be buying something with a max of around $300 million to $2 billion. On the other hand, larger businesses often extend all the way up to $10 billion or more. Mid-level options fall somewhere in between the two.