Investor's Perspective: Market Capitalization Explained
As an investor, it is important to have a basic understanding of market capitalization, especially as it pertains to the stock market. Market Capitalization gives you a 30,000-foot view of what the market perceives to be the value of a particular business. Generally speaking, larger market cap companies are perceived to be more stable than smaller market cap companies.
On the other hand, it is important for you as an investor to note that smaller market cap companies tend to have more growth potential.
These are important factors to keep in mind as you routinely assess your risk tolerance and time horizon as your financial goals evolve over time.
Market capitalization is calculated by multiplying the current stock price by the number of outstanding shares.
Market capitalization is a good measuring stick for identifying the overall size of the company which typically falls into one of the following three buckets...
1. Large-Cap: $10 billion +
2. Mid-Cap: $2 - $10 billion
3. Small-Cap: less than $2 billion
Understanding market capitalization is especially important when you are constructing your portfolio allocation and identifying your market exposure. It might make sense for you to have some exposure to small-cap stocks if you have a longer time-horizon. Or it may be more prudent for you to limit your equity exposure to large-cap stocks if you have a shorter time-horizon with a conservative investment approach.
Last but certainly not least, always consult with your trusted advisor before you proceed with any investment decisions.
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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.
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