Market capitalization, or market cap as it commonly referred to, is a measure of the value of a company. It is calculated by multiplying the share price by the number of shares outstanding. In short, it is the Financial Markets opinion of what the publicly held portion of a company is worth. It is also representative of what the company’s equity is equal to. It is important to note that the price of a stock is only part of the calculation so you will often see cases where lower price stocks have a higher Market Capitalization than a higher priced stock due to the number of shares outstanding.
While there are no official definition of the exact break points and different indexes using different criteria the following are the most commonly accepted criteria from smallest to largest:
1) Nano-cap (below $50 million) These are the smallest stocks publicly traded are commonly referred to as “penny stocks” and are very risky. They are often start-up companies with little or no revenue and little or no cash to fund ongoing day to day operations. There is virtually no market in these securities with only a handful of market makers and the spread between the Bid and Ask can be 50% or higher and any large purchases or sales usually will send the price substantially higher or lower. Their limited size restricts the ability of Mutual Funds and ETFs to invest in them as a nominal investment by a Mutual Fund (by their standards) would represent too substantial of an ownership interest in the Company. Most Mutual Funds and ETFs prohibit themselves from owning a controlling interest in a Company. There are also no Indexes that track these types of stocks.
2) Micro-cap ($50 million to $250 million): While larger than Nano-cap stocks they are still among the smallest and riskiest companies to invest in. Again, think “penny stocks”. There is the potential for great growth as well as complete failure and loss of investment. When trading these stocks there is often little or no market to sell these securities and often a wide disparity between the bid and offer prices, sometimes greater than 30%. Like Nano-cap companies, there is virtually no market in these securities with only a handful of market makers and the spread between the Bid and Ask can be 50% or higher and any large purchases or sales usually will send the price substantially higher or lower.. Their limited size restricts the ability of Mutual Funds and ETFs to invest in them as a nominal investment by a Mutual Fund (by their standards) would represent too substantial of an ownership interest in the Company. Most Mutual Funds and ETFs prohibit themselves from owning a controlling interest in a Company. There are also no Indexes that track these types of stocks.
3) Small-cap ($250 million to $1 billion): These companies are usually more established than Nano-caps and Micro-caps and are typically new companies. When trading these stocks there is often little or no market to sell these securities and often a wide disparity between the bid and offer prices, sometimes greater than 20%. There is usually a larger number of Market Makers than Nano-caps or Micro-caps and their support for the prices of the stock is more stable as well. These stocks can often be found on the Russell 3000 index..
4) Mid-cap ($1 billion to $5 billion): These companies are usually more established and can offer a more stable business model than their smaller counterparts. They offer a more reasonable trading market with more market makers and more price support if you are looking to sell. They often trade on Exchanges as well as Over the Counter (OTC). Many of the stocks of the S&P 500 fall into this category.
5) Large-cap ($5 billion to $200 billion): Stocks that are referred to as “blue chips”, such as in the Dow Jones Industrial Average, normally fall into this category. They offer an established business model with verifiable financial numbers. The trading markets are well established and liquid. They often pay a dividend but it not a requirement. Stocks
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