Market capitalization is nothing but the total number of outstanding shares of a company multiplied by the market price per share.
Sounds quite easy, doesn’t it? But there is more to the concept of market capitalization than just the above basic definition.
Market capitalization of a stock shows the size of the company and most of the times, the volatility of a stock depends on its market capitalization.
Let me put this in a different way.
So we have three images. Image A- a bike, Image B- a car and Image C- a truck. If I ask you a simple question as to which of these is easy to push in case these vehicles are stuck, the answer would be the bike, then the car and the most difficult to push would be the truck.
You see this is very much comparable to the market capitalization of the stocks.
Image A depicts stocks with smaller capitalization. Image B depicts stocks with medium capitalization and Image C represents the stocks with large capitalization. The people pushing these vehicles are the investors. The more they push the more the vehicle move ahead. If they stop pushing it, the vehicle would move back.
CASE A- Pushing the bike
A bike requires one or two people to push and can be very easily pushed. So is the case with small cap stocks. A lot lesser number of investors can lift the stock up or bring it down.These small cap stocks show great movement both upwards and downwards. Hence, they tend to be more volatile. For the same reason when such small cap stocks are performing really well, they can turn out to be potential multibagger. But then again, these are high beta stocks and they are riskier than the blue chip large cap stocks.
CASE B- Pushing the car
A car requires more people than a bike to push it. Hence again this is comparable to mid cap stocks. These too tend to be more volatile than the large cap stocks. But they tend to give fancier returns than the large cap stocks.
CASE C- Pushing the truck
A truck requires many people to push it. The behavior of large cap stocks is akin to this. The large cap stocks require lot of investors showing great deal of interest in them for it to show a big move both ways. So, even if few investors sell the stock, the stock won’t fall much. The same is true the other way round as well. The stock won’t go up a lot if few investors buy it. Hence, these stocks are less riskier than the small and mid cap stocks. People who hate the volatility in the stock market and are having conservative approach of investing their money generally invest in large cap stocks. They tend to be safer bet as compared to the small or mid cap stocks.
How to see Market cap of a stock ?
The highlighted part shows the market cap