Stock Market Basics: Market Capitalization

Just like at a fast food restaurant and the new Verizon data plans, you have small, medium and large options in the stock market. More specifically small capital equities, medium capital equities and large capital equities. Each company on the market is classified by the market capitalization.

Market Capitalization = Price/Share  *  Number of Outstanding Shares

I've referenced Yahoo!Finance a bit on this blog because it's one of my favorite places to look for information. Taking a snapshot of one of my all time favorite companies, Starbucks, you see I've highlighted in pink boxes the key values for finding the market capitalization. You can take the easy route and look in the first picture at the second box which says "Market Cap" and find that it is recorded as $90.1 billion. Or you can be analytical about it and find the current price of Starbucks, which is $60.68/share and multiply that by the 1.48 billion outstanding shares (in the second snapshot) and get approximately $89.9 billion. That's pretty close to what is recorded as the actual market capitalization of $90.1 billion. The reason very close works is because the market price fluctuates all day during the trading day, but the number of shares outstanding stays the same unless the company participates in a buy back, a stock split or puts more of itself on the market.

Both snapshots are taken from Yahoo!Finance  Starbucks

Now that you know where to find this metric, here are a few general trends these classes of equities/stocks follow:

Equity Type	Market Capitalization	Annual Returns*	Perceived Market Risk Rank	Risk Level
Small Capital Equities	Less than $2 billion	More that 20% per year	High	Moderate Aggressive to Aggressive
Medium Capital Equities	$2 to $10 billion	12% to 20% per year	Medium	Moderate to Moderate Aggressive
Large Capital Equities	Greater than $10 billion	5%to 12% per year	Low	Moderate Conservative to Moderate

The annual returns has a star beside it because it is an approximation and just a guideline as to what kind of returns you can expect from the different size companies. Smaller companies carry higher risk because sometimes they do not have the market history to establish them as a stable investment. But with higher risk, you have an opportunity for a higher return. Medium and large capital companies tend to be more stable and safer investments for the more risk averse. Large companies are more likely to pay hefty dividends and generate high rate of returns for their shareholders, that's why the moderate and moderate conservative crowd would be most interested in this category of stocks.

Hopefully you got some good tips from this post on how to check companies for their market capitalization. Tomorrow is Company Review Thursday!! Stay tuned.