Market Cap
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.
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