Market capitalization means how much the stock market believes a company is worth. It is calculated as the number of shares multiplied by the current market value of one share.
How can I use information about the market cap when investing in equities?
- You can use market capitalization as an investment criterion. Companies are typically divided according to market capitalization: large-cap ($10 billion or more), mid-cap ($2 billion to $10 billion), and small-cap ($300 million to $2 billion). Some investors are more risk-tolerant and might prefer small-cap companies, usually more volatile – it takes a smaller trading volume to significantly move their price up or down. Other investors might be more risk-tolerant and might only be comfortable investing in large-cap companies as they're less volatile.
- However, despite higher volatility, small-cap stocks have outperformed large-cap stocks since the 1920s. The Fama French 3 Factor Stock Pricing Model further supports this hypothesis: its small-minus-big (SMB) factor, which measures the excess return that small-cap companies return compared to large-cap companies, has historically been positive.
Debt to Equity Ratio
Used to evaluate a company's financial leverage and is calculated by dividing a company's total liabilities by its shareholder equity.
Profit is the financial benefit realized when revenue from a business is higher than the costs and taxes involved in operating that business.
Alternative investment class composed of funds that invest directly in private companies or that buy public companies and take them private
Time of declining economic activity, lasting more than a few months, normally visible in real GDP, real income, employment, industrial production, and sales.
A stimulus package is a coordinated effort by the government to increase spending and investment to "stimulate" an economy out of a downturn.
Shorting a stock
Trading strategy that tries to take advantage of the decline in a stock price by borrowing a stock and sell it now while planning to repurchase it later for a lower price.
Market-capitalization-weighted index tracking the performance of the 500 largest U.S. companies