4 Reasons Every Investor Should Care About Market Cap

"Market cap" is a term that is short for market capitalization. This term is used to describe the market value of a company that is based on the share price of the stock and the number of outstanding shares in the market place. While this term is commonly used with investors, many people do not realize why it is important. Here are a few reasons that every investor should care about market cap.

1. Valuing the Company

With market capitalization, you can tell approximately how big a company is. In order to calculate market capitalization, you take the number of outstanding shares of the company and multiply that number by the share price. This allows you to get a general overview of the size of a company. It is important to know the size of a company when you are trying to compare it to other companies.

Many times, you need to look at the performance of a company in relation to other companies within the same industry. However, you should not compare a large cap company to a small cap company within the same industry. This will skew your comparison and will not provide you with the information that you need to make an educated investment decision.

2. Growth Potential

If you are trying to gauge the growth potential of a company, you should also look at the market capitalization. In most cases, small-cap companies tend to have much more room to grow than larger ones. Large companies have typically expanded into many markets and they have grown to a point where additional growth is not that likely. Extremely large companies are difficult to navigate in the market and they do not have as much opportunity for capital appreciation. Small cap stocks can quickly adapt to the market and they can continue to expand. If you are looking for capital appreciation, you may be interested in these smaller companies. Market cap gives you a tool to determine exactly how big a company is.

3. Dividend Potential

Some investors are more interested in receiving dividends instead of realizing capital appreciation. Most companies that pay regular dividends are large and successful. While some smaller companies will pay dividends, larger companies are much more likely to do so on a regular basis. They have a certain amount of profit coming in every month and they, in turn, sure that profit with the investors. Because of this, if you are interested in dividends, you should look for companies that have a larger market capitalization. 

4. Mergers

Market capitalization also plays a vital role in the process of mergers and acquisitions. When a company is looking to acquire another company, they look at the market capitalization to determine how much they will have to pay for the company. If you are an investor in a larger company, and you hear that they are thinking about purchasing a smaller company, you can can calculate and estimate how the size of the company will change.