What is Market Capitalization - What is Market Capitalization

What is Market Capitalization

Author: Michael view: 40 Update: 02/10/2023 Downloads: 0

Market capitalization is an important concept in the field of finance and investment. Market capitalization reflects the overall value of a company listed on a stock exchange. It is calculated by multiplying a company’s outstanding shares by its current stock price.

Market capitalization is an important indicator of the size and importance of a company. Here are some points to note about the meaning of market capitalization.

1. Reflects the company’s values and dimensions

Higher market capitalization indicates greater value of the company. Large capitalization companies are usually large companies with extensive business operations. Capitalization reflects a company’s size and position in the market relative to its competitors.

For example, Apple, Microsoft, Amazon are companies with very large market capitalizations, demonstrating their industry-leading positions. In contrast, startups often have small capitalization because they are new to the market. What is Market Capitalization - What is Market Capitalization

2. Reflects the company’s prospects and strength

Market capitalization shows investors’ expectations about a company’s future growth prospects and profitability. Companies with large capitalization are often companies with effective business operations, the ability to expand and develop sustainably.

A company with a strong market capitalization shows that investors have confidence in the company’s growth prospects. On the contrary, a sharp decrease in capitalization is a sign that investors are losing confidence in the company.

3. Affects stock liquidity

Stocks of large capitalization companies often have better liquidity. This means investors can buy and sell the company’s shares more easily due to the large number of transactions.

On the contrary, stocks of small capitalization companies often receive little attention and low trading volume, so investors have more difficulty buying and selling. When choosing investment stocks, investors need to pay attention to capitalization to ensure liquidity.

4. Affects the company’s ability to mobilize capital

Companies with large capitalization will have an easier time raising capital through issuing additional shares or corporate bonds. Investors in general will tend to trust large companies, making it easier for companies to raise capital to expand their business.

On the contrary, small companies will have more difficulty raising capital. This affects the company’s ability to develop and compete.

5. Affects the company’s position in the industry

The leading large-cap companies in the industry often have a great influence on the development of the industry. Their decisions can greatly impact other companies in the same industry.

Large companies also often hold leading technology, human resources, and brands, helping to maintain their leading position in the industry. Capitalization reflects a company’s position and influence on the overall development of the industry.

6. Standards for ranking companies on the stock market

Stock exchanges often rank and classify listed companies based on capitalization size. Stock indices such as VN30 also select stocks based on capitalization.

Capitalization is an important standard to evaluate the size and position of companies on the stock market. Investors are often interested in large companies with top capitalization.

Thus, it can be seen that market capitalization is an important indicator reflecting the value and stature of a company. Large capitalization represents a company’s large size, prestige, and leading position in the industry. This is one of the top factors to consider when evaluating a company for investment.

6.1 How to calculate market capitalization

Market capitalization is calculated based on 2 main factors:

Number of outstanding shares

Current stock price

Formula to calculate market capitalization:

Market capitalization = Number of outstanding shares x Current stock price

For example:

Company A has 1 million shares outstanding. The current stock price is 25USD/share.

=> Market capitalization of Company A = 1 million x 25= 25 million USD

Thus, to calculate market capitalization, it is necessary to note:

Use the number of outstanding shares, not the number of shares registered for issuance.

Use the current stock price listed on the stock exchange, not the face value.

Update the latest data on the number of outstanding shares and stock prices to ensure accuracy.

Market capitalization changes daily according to stock price movements, so it needs to be updated regularly.

Investors can calculate the market capitalization of companies based on the above formula. This is a simple way to gauge the size and compare the size of companies.

6.2 Meaning of P/E ratio in stock analysis

P/E (Price/Earnings ratio) is the ratio of stock price to earnings per share, an important index widely used by investors to evaluate stocks. The meaning of P/E in stock analysis is as follows:

1. Compare stock valuations

P/E allows comparing the valuation of stocks in the same industry. Stocks with higher P/E are valued higher relative to their earnings per share. Investors can compare P/E to find stocks with attractive valuations.

2. Assess the level of growth

P/E reflects the company’s profit growth expectations. Companies that are expected to grow strongly will have a higher P/E. P/E helps investors evaluate a company’s development prospects.

3. Determine the appropriate time to buy/sell

When the market P/E is high compared to the industry average, investors should consider selling shares to take profits. On the contrary, when P/E is low, this may be the right time to buy.

4. Analyze investment risks

A high P/E level shows that investors expect the company’s profits to increase sharply in the future. However, this expectation also poses a great risk if the company does not calculate the P/E ratio

Formula to calculate P/E ratio:

P/E = Current stock price / Earnings per share

In there:

Current stock price: is the most recent closing price of the stock

Earnings per share (EPS): is a company’s net profit divided by the number of outstanding shares

For example:

Company A has a closing stock price today of 1 USD

Company A’s net profit is 20 million USD

The number of outstanding shares is 10 million shares

=> Earnings per share (EPS) = 20 million / 100 million = 0.2 USD

=> P/E of Company A = 1 / 0.2 = 5 times

Thus, to calculate P/E, it is necessary to note:

Use the most recent stock price, usually the closing price of the last trading session

EPS is based on the company’s most recent earnings report

Update P/E regularly according to stock price movements

Compare the stock’s P/E with the industry’s average P/E to evaluate valuation

Investors should calculate and compare P/E to choose stocks with attractive valuations consistent with their investment goals.

Market capitalization FAQ

1. Why should we care about market capitalization when investing in stocks?

Market capitalization reflects a company’s value and size. Large company stocks often have good liquidity and are easier to buy and sell than small company stocks. Large capitalization also shows the reputation and solid position of the business.

2. How to know the market capitalization of a company?

Investors can look up the company’s market capitalization on financial websites, or calculate it themselves based on the number of outstanding shares and the current stock price.

3. How does market capitalization affect a company’s business operations?

Enterprises with large capitalization will have an easier time raising capital to expand their business. They also have a better competitive advantage and market orientation than their smaller competitors.

4. Is market capitalization always the same?

Market capitalization changes daily according to stock price movements. When the company’s business results and prospects are good, the stock price increases and the market capitalization will increase accordingly.

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