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Market cap
Dear Dollar Diva,
What is market capitalization?
Market capitalization is the value of all shares of
a company's stock outstanding (that is, in the hands of the public)
at the current share price. If a company has 1 million shares outstanding,
and the stock is selling for $100 a share, the company's market
capitalization would be $100 million. Market cap is used as a guide
for diversification. Companies are classified by market cap. Classifications
are not set in stone, but this will give you an idea of how they
work:
| Large-cap: |
More than $5 billion |
| Mid-cap: |
$1 billion to $5 billion |
| Small-cap: |
$200 million to $1 billion |
| Micro-cap: |
Less than $200 million |
Who values the shares?
Why does a stock go up from $50 a share to $60 a share?
And what makes it go down? Theoretically, the market -- the investors
who buy and sell the shares -- determines what a stock is worth.
Investor expectations in three areas are the driving force behind
the movement in a stock price:
- Earnings growth
- Inflation
- Risk
Why are tech stocks so highly valued?
Investors have placed a high value on tech stocks,
and this is reflected in their high price/earnings ratios. As the
price goes up, the P/E goes up. Record high P/Es are the result
of investors' expectations of:
- Strong earnings growth over the next five
years
- Continued low inflation
- Continued bull market
Analysts predict the average annual growth over the
next five years, and there is usually a correlation between the
growth predictions for a company and its P/E ratio.
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American Online Inc.
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177
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50
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Microsoft Corp.
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77
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25
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Pfizer Inc.
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56
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20
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General Electric Co.
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48
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15
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Proctor & Gamble Co.
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45
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13
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Merck & Co. Inc.
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30
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12
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| Source: Fidelity Investments
1/18/00 |
| These stocks are examples,
and their inclusion on this chart is not an endorsement by Bankrate.com.
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Now that you know what market capitalization is, you
can use it to diversify your portfolio. And when you hear TV talking
heads chattering on about P/E ratios and company growth, you'll
be all over it.
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-- Posted: Jan. 26, 2000
DOROTHY ROSEN has a master's degree in finance, with a specialization in accounting,
from the Kellogg Graduate School at Northwestern University in Evanston,
Ill. Rosen has more than 15 years of experience in the financial arena, serving
in Illinois and Florida as a certified public accountant, financial consultant,
expert witness and educator. She is owner of Dorothy Rosen, CPA, a public
accounting firm that serves individuals and small businesses.
