What is market capitalization and why you need to care
Market capitalization is used to help gauge how much a company is worth. Learn about small-cap, mid-cap and large-cap stocks, too.
Toronto Stock ExchangeDec. 08, 2020
Market capitalization, or market cap for short, tells investors how much a public company is worth in dollars. Market cap is calculated by multiplying the number of shares outstanding by the current trading price of a single share.
In Canada, there are over 3,200 public companies with market caps ranging from less than $1 million to over $150 billion.
The smallest companies on this list (often called "small-cap stocks") consist of mostly young and new companies with a short track record. Most are in the very early stages of growth. As such, many investors will keep an eye out on small-cap stocks while waiting for more concrete signs of growth or confirmation of struggles.
The companies in the middle of the pack in Canada (often called "mid-cap stocks") can be difficult to analyze as it may be unclear if they are merely entering an era of growth, or if it is coming to an end. For example, a mid-cap stock which was once worth $100 million and now worth $1 billion has given investors a return of 10 times their investment. Some investors may think there is more upside ahead while others are ready to call an end to the gains and take their profit.
Finally, companies at the largest end of the list (typically called "large-cap stocks") are often companies with a global presence. These companies are often flush with cash and able to reward investors with a consistent and growing dividend.
Why investors care
Novice investors may ask why they should care what a company is worth. Market capitalization is in essence crowd-sourced since it is based on the stock movement determined by the buying and selling activity of all investors.
Investors have specific reasons to value one company at $50 million and another at $50 billion. Is the smaller valued company struggling with high levels of debt or losing market share to competitors? Similarly, there must be a compelling reason why a company is worth $50 billion. Perhaps they are a national chain with zero debt and a path to generate billions of dollars of annual profit for years to come.