By Michael Tibbits, YouCanTrade
When you are ready to begin investing it’s normal to have questions like: “Which companies should I invest in? Does the size of the company matter? How can I diversify my risk?”
There are two main ways a company can raise capital when it’s needed: debt or equity. Debt instruments, such as corporate bonds, are a way for a company to take a loan from an investor. Corporate bonds are paid back to the investor along with regular interest payments throughout the duration of the bond. Raising money through equity, or issuing stock, may cost more, but they don’t require paying anyone back. As a result, a company’s capital structure tends to be mix of cash generated from debt and equity fund raising activities. Understanding how companies raise funds can tell investors a lot about the growth prospects for a company.
What is Market Cap?
One way to gain insight about a company’s capital structure and market depth is by calculating its market capitalization. Market capitalization, or market cap for short, measures the market value of a company’s outstanding shares. This can be calculated by multiplying the stock’s price by the total number of shares outstanding.
Shares outstanding is the number of stock shares issued by the company and in the hands of the public. This number represents the shares being traded in the open market.
Example: As of the most recent quarterly report released on January 28, Apple Inc reported a total of 16,788,096,000* outstanding shares as of January 15. We can take the closing price of Apple from January 15, which was $127.14 per share and multiply it by the total number of shares outstanding reported giving Apple a Market Cap of $2,134,438,525,440. Since Market Cap is usually a large number, it is common to see market cap abbreviated to three or four decimal places such $2.13T or $2.134T, respectively.
*Shares outstanding is taken from the most recently filed quarterly or annual report.
Comparing two companies using Market Cap
If company A has 10 billion shares outstanding at a price of $1, it has a market capitalization of $10 billion. If company B has one billion shares outstanding at a price of $5, company B has a market capitalization of $5 billion. Even though company A has a lower stock price, it has a higher market capitalization than company B. Company B may have the higher stock price, but it has one-tenth of the shares outstanding.
To learn about market cap classifications, check out Investing Basics – Market Cap Classifications.
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