Market capitalization, also known as market capitalization, is the total market value of a public company. It is calculated by multiplying the total number of shares in the company by the current price of a share.
The market capitalization formula is:
Market capitalization = Total number of shares x Price of one share
For example: If a company has 1 million shares, each valued at 100 lei, its market capitalization will be: 1,000,000 x 100 = 100,000,000,000 lei.
Market capitalization is an important indicator that reflects the size of the company on the market.
Market capitalization: advantages and limitations
Advantages
- Easy to calculate: It’s simple to obtain stock information and prices to calculate market capitalization.
- Investor indicator: Provides an overview of the size and risks associated with a company.
- Comparability: Allows investors to compare companies of different sizes.
Limitations
- Does not reflect intrinsic value: Market capitalization does not indicate whether a company is under- or overvalued.
- Market Influence: Share prices, which influence capitalization, can fluctuate for reasons not directly related to a company’s financial performance.
- Emotional effects: Market psychology can cause prices to rise or fall sharply, thus affecting perceived value.
What factors influence market capitalization?
Factors that can increase or decrease market capitalization include:
- Financial performance: good company results attract investors and increase the share price.
- Industry developments: Technological or economic changes that affect the entire industry.
- Market sentiment: Investor emotions and perceptions have a major impact on stock prices.
- Enlargement or downsizing: If a company issues new shares or repurchases them, capitalization can change significantly.
How we use market capitalization
Here are some practical tips:
- Choose companies that suit your goals: If you tolerate risk, companies with small market capitalization might be ideal. If you prefer safety, opt for companies with large market capitalization.
- Use capitalization for diversification: Invest in companies in different categories to reduce your overall risk.
- Monitor changes: Pay attention to price fluctuations and recent company valuations to make informed decisions.
For more information, also read market cap.
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