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Tuesday, February 02, 2010

Market Capitalization

One thing newbie investors are often confused about is a stock's market capitalization. A company's market capitalization is simply the value of the company as priced by the stock market. The market capitalization is taken by the price of the stock times the amount of shares outstanding.

For example, if there are 100 million shares of company XYZ and those shares are trading at $35 a share, then company XYZ has a market capitalization of $3.5 billion.

Stocks with a larger market capitalization are generally seen as 'safer' investments, since the company itself is larger. However, large-cap stocks also do not have as much growth potential as small cap stocks. For a $1 billion stock to triple, it just needs to become a $3 billion company. For a $200 billion company to triple, it needs to become a $600 billion company.

Stocks are generally classified as mega-cap, large-cap, mid-cap, small-cap, or micro-cap stock based on their market capitalization. There is no set definition for these terms. What some consider a small-cap others might consider a micro-cap. Nevertheless, here's a general guideline to give you an idea what market capitalizations fit these terms:

Mega Cap: $200 billion or more (very few companies fit this category)

Large Cap: $10 billion to $200 billion

Mid Cap: $2 billion to $10 billion

Small Cap: $250 million to $2 billion

Micro Cap: Less than $250 million
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