Market Capitalization Versus Per Share Price
Relevance of Market Capitalization in Stock Investing
Don’t under-rate the importance of market capitalization when making stock investing decision. If you want to buy stocks, you will have many things to put into consideration before you finally settle at a particular stock. Your decision will be influenced by many factors. But most importantly, you need to ensure that your choice of any stock aligns with your investment objectives.
You will always find many stocks that correspond with your investment goals. For this reason, it may not be an easy task picking a stock among others. For instance, if you are a beginner investor, you may find yourself at a crossroad not knowing whether to base your investing in stocks decision on per share price or market capitalization. Per share price simply means the amount that a unit of a stock is being sold for. For example, if the per share price of a stock is $20 and you want to buy 500 units of such stock, you will need to pay $10,000 excluding any other trading costs that may apply. On the other hand, market capitalization is the value of a company based on its total outstanding shares. If the price per share of a company is $5 with a total outstanding shares of 200 million shares, the market capitalization of such of the company will be $1 billion.
The question now is, what should be given a priority between per share price and market capitalization when you are comparing two stocks? Do I choose the company with higher per share or the one with the higher market capitalization? Well, you cannot make investment decision in isolation of other factors that may affect the price of the stocks. Ordinarily, the stock with higher per share price appears to command higher value than another stock with lower per share price. But you should not forget about your fundamental analysis. The price of a stock may go up as a result of a particular news that is made available in the market. This may make the per share price of the stock not to reflect its true worth. Market can be sentimental at times. That is why it can be dangerous when an investor allows to be carried away by per share price of a stock.
Read Also: How to Identify Undervalued Stocks
On the other hand, market capitalization of a company seems to be more reliable as it shows the value of the entire company. But the problem also is that, market capitalization is a function of the per share price of a stock and the total number outstanding shares of the company. That is, market capitalization is arrived at by multiplying per share price by the total number outstanding shares of the company. The higher the unit price of a stock, the higher the market capitalization becomes. Do you see while comparing per share price and market capitalization can be confusing? The only thing is that, if you are comparing two companies in the same industry, the one with higher market capitalization could be regarded to be stronger. And such company can easily absorb any financial shock that may happen without necessarily having much impact on the company. That is why I will rather choose to base my investment decision on market capitalization instead of per share price. But you should always remember that my own situation is peculiar to me. What is good for me may not be the right thing for you. Therefore, you should endeavour to consult a financial advisor who will guide you in making the right investment decision.
Nevertheless, market capitalization can be a good way to assess the risk involved in buying stocks of a particular stocks. Market capitalization of public traded companies is broadly categorized into large cap, mid cap and small cap stocks. Let me explain these briefly:
Large Cap: These are companies with market capitalization of $10 billion dollars and above. These companies tend to be more stable as they have been around for some time. They have been able to survive different types of economy. They tend to dominate their industry as they enjoy good market share. Investing in such companies carry less risks. However, the growth potential of such companies is low. Large cap stocks will be good for people who don’t want to take much risk but want to enjoy stable dividend income. Good examples of large cap companies are Procter and Gamble, General Electric, AT & T, Apple and Nestle. The companies mentioned here can also be regarded as mega cap as their market capitalization are well above $200 billion. The benchmark for large cap stocks is $10 billion.
Mid Cap: These are the companies with market capitalization ranging between $2 billion and $10 billion. This type of stocks are riskier than large cap stocks but it also offers higher growth potential. Just as the name is, mid cap companies are in between large cap companies and small cap companies. If small cap is too risky from you or you want to enjoy the growth more than what large cap stocks offer, mid cap stocks can be what to settle for.
Small Cap: Companies with market capitalization between $300 million and $2 billion are classified as small cap companies. In most cases, the companies are relatively young with a very high growth potential. They risk involved in investing into small cap companies is very high. There is no guaranty that the company will be able to survive. In term of competition, they don’t have much resources to compete in the market with large cap companies. However, if small cap company can succeed in creating a niche for itself, the investment can be worthwhile.