What Is Market Cap? Everything You Need To Know

Small-Cap

More often than not, small-cap stocks are relatively new to the market. Since they haven’t had much time to establish themselves (or their revenues), small-cap stocks typically reside within the $300 million to $2 billion market value range. As with recent IPOs (initial public offerings), small caps tend to have a lot of growth potential. After all, there’s only one way to go once you start at the bottom. With the growth opportunity, however, comes a lot of risk. Without an established foundation to build off of (and oftentimes no revenue), small caps can also be very risky.

Some of the most familiar small-cap stocks in today’s market include:

  • The Cheesecake Factory Incorporated (NASDAQ: CAKE): $2.894 billion market cap

  • Yelp Inc. (NYSE: YELP): $2.869 billion market cap

  • iRobot Corporation (NASDAQ: IRBT): $2.796 billion market cap

  • Boise Cascade Company (NYSE: BCC): $2.767 billion market cap

  • Jack in the Box Inc. (NASDAQ: JACK): $2.73 billion market cap

Micro-Cap

The term micro-cap is typically reserved for what investors call “penny stocks.” As their names suggest, penny stocks denote businesses with market caps that range from $50 million to $300 million. Consequently, micro caps are usually small startups with a lot to prove. Oftentimes, new biotech companies with speculative products or pharmaceutical companies developing a new drug fall under the micro-cap category. For what it’s worth, most are speculative because they haven’t proven themselves yet. However, the decision to go public suggests something is in the works. Either way, these stocks are highly volatile, and more will fail than succeed. Those that make it to the small-cap category, however, boast incredible upside.

Nano-Cap

Nano caps denote businesses with market caps below $50 million and can usually be found “over the counter.” Not surprisingly, nano caps represent the smallest companies with the smallest market valuations. However, as the least valuable businesses, nano caps represent the ultimate “high-risk/high-reward” play in the market. Not unlike their micro-cap counterparts, nano caps are incredibly risky because they haven’t proven anything to investors (some don’t even have a product or revenue). However, there’s always the chance a nano-cap stock pulls through and realizes its true potential. Investors who bet on the right nano caps stand to reap a lot of rewards, but real winners in this category are few and far between.

Why Is Market Cap Important?

The market cap of an individual company helps investors gauge how the stock market as a whole views the respective business. In other words, the market value is how Wall Street perceives the value of public companies. That’s an important distinction to make, as far too many new investors choose to value stocks based on the price of their individual shares. Through no fault of their own, inexperienced investors are led to believe that the higher a stock’s price, the better it is; that’s simply not true. In fact, valuing a company based on its stock price is reckless and ill-advised. Instead, the market cap will give investors a better idea of how to gauge the company’s true value. The market cap is one of the ways investors find undervalued stocks to invest in.

While evaluating a stock based on its market cap will give investors a better idea of how much the company is worth, the real benefit of a sizable market cap is the capital a business may put to use. Typically, companies with larger market caps have more money to deploy, increasing the likelihood of receiving positive sentiment on Wall Street. Therein lies the real benefit of a large market cap: Investors want to invest in companies who can grow and exceed expectations. The market cap is generally used to gauge how prepared a company may grow by investing in itself.

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