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Evaluating Companies using Market Capitalization
Market Cap Defined:
Market capitalization or market cap is one way to compare two different stocks that have similar market prices. A market cap valuation is an
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additional method for grouping stocks outside of their sector or industry. Market Cap =
Total Outstanding Common Shares
x
Current Market Price
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Common Misunderstanding:
A common misunderstanding held by novice investors is to judge the size of a company based on its stock price. It is not always the case that a company with a higher stock price is larger than a company with a lower stock price.
Example: Stock Price and Market Capitalization are Greater
| | Google Inc. | Yahoo Inc. |
| Market Cap |
$120.83 Billion |
$35.41 Billion |
| Market Price |
$397.00 |
$25.64 |
Example: Stock Price is Greater, but Market Capitalization is Less
| | JPMorgan Chase & Co. | Morgan Stanley |
| Market Cap |
$163.92 Billion |
$77.56 Billion |
| Market Price |
$47.22 |
$72.35 |
General Inferences:
Market cap size can indicate the growth rate of a company. Typically, the larger the market cap, the more stable and less growth potential a company has. However, in the above example, Google Inc. has grown quickly over the past 14 years, and continues to show signs of positive growth: Goolge News. This quick growth rate is not a common characteristic of public companies.
It is important to understand that market capitalization may fluctuate because of acquisitions, divestitures, and stock repurchases; these reasons may be unrelated to stock performance.
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