Finding out the true value of any company in the world of investment plays a big part. Once the real value of the company is known, it is easy to decide whether to invest in the shares of the company or not. Of course, there are different ways to evaluate public companies and their stocks. One of them is market capitalization (market cap).
The market capitalization of any company is the amount required to purchase all the shares of the company based on the current market price. In other words, the market capitalization of a company is when the total listed shares of the company are multiplied by the market price per share.
t is also a way of determining the size of a company based on the price paid by the investor. Similarly, calculating all the listed companies in this way gives the total market capitalization. Now, let’s discuss how market capitalization works and why it matters in our investment strategy.
What is market capitalization?
In a general sense, market capitalization is the total value of a company’s listed shares. Market capitalization is expressed in the local currency of any country. It is important to know that market capitalization is actually made up of two sides. The first is the total listed shares of the company and the second is the market price of each share.
The market capitalization can be found on the listed stock of the company and in some cases on the company’s website. In Nepal, it is easy to see the market capitalization of a listed company from the website of market operator Nepse. Market capitalization can also be calculated on its own. Multiplying the listed shares of the company by the market price gives an easy market capitalization.
Why does market capitalization change?
‘Market capitalization’ is directly related to the market price of a company. Therefore, as the market price of a listed company fluctuates daily, its market capitalization also changes daily. If the market price of the company increases then the market capitalization also increases and when the market price decreases then the capitalization also decreases.
Changes in the number of listed shares of a company also affect the market capitalization. The company is also raising capital by issuing bonus and rights shares, FPO and other tools. Thus, even if the company’s shares are added, the market capitalization increases. However, adding shares does not necessarily increase
Types of market capitalization and investment strategy
We have heard that companies are classified on the basis of market capitalization. This classification also helps investors choose the right stock based on their investment strategy and risk-bearing capacity.
However, there is no legal or official provision for the classification of market capitalization. Boundaries are generally set by consensus for the classification of market capitalization.
Large cap valuation
Companies with a large market capitalization are classified as ‘Large Cap’. Countries with large economies typically place companies with a market capitalization of more than अर्ब 10 billion in a large cap. But these limits can be different and different.
In the case of Nepal, companies with a market capitalization of more than Rs 100 billion are likely to fall into the ‘large cap’ category. Such companies are supported by share price and regular and stable income for a long time. Therefore, large cap companies are generally less risky investments.
However, the price of such a company does not rise so fast as it is a mature company providing regular income. Large cap stocks offer consistent returns. In general, most bluechip companies tend to have large caps. But in practice we have not yet been classified in this way
Mid cap assessment
Generally, large and established companies are among the mid-cap companies. As the name suggests, mid-cap companies occupy a middle ground for investors. Such companies may be more risky than large caps.
However, it is considered relatively safe to invest. Shares of mid-cap companies may be slightly more volatile than large-cap ones. However, it is believed that the growth potential of such companies is higher.
Small Cap Assessment
Small caps are even more risky. Such companies are very volatile in terms of price. However, small capital companies are more likely to offer higher capital gains in the future due to smaller capital. In fact, such companies are often the choice of growth oriented investors.
Finding and holding a small cap company with good growth potential can be very rewarding. However, there is no guarantee that such companies will be able to pay dividends regularly. Therefore, small cap companies have high risk as well as high profit opportunities. It is necessary to study the major financial indicators of the company to get maximum benefit
Micro Cap Evaluation
Even smaller companies with smaller market capitalization can be placed in the micro-cap category. Such companies are considered as risky investments as they have high volatility. Generally, companies with a market capitalization of less than Rs 2 billion can be classified as micro-cap. But in the case of Nepal, the capital may be much less than that.
Why is market capitalization important?
Market capitalization is an important concept as it helps the investor to know the size of the company and the market valuation of the company concerned. Companies with different market capitalization also have different growth potential, dividend potential and risk. Therefore, it also helps you to decide how to build a portfolio.
Market capitalization helps in deciding whether to make the portfolio value oriented or growth oriented or aggressive portfolio traditional. Some have kept a risk-free company with a large capital and consistently consistent returns on their portfolios. Similarly, some people keep only small cap companies with high return potential in their portfolio despite taking risks.
However, there are definite differences in the different categories of market capitalization. Although research has shown that small cap companies are more volatile than large cap and mid cap, the performance is much better. Small cap companies tend to give higher returns on average. But the risk is also higher