What is capitalization? What is the place of its assessment in investing?
In the modern press, economic concepts are increasingly used, the meaning of which is not known to the common man. Television reports and news articles are full of slang terms that are understandable only to professionals. In addition, in the absolute majority of cases they use foreign borrowing, for example, "derivatives", "legitimation", "management" and others. At the same time, with the popularization of alternative ways of investing free cash resources, it becomes more difficult without understanding, for example, what capitalization is. We will try to understand the meaning of this term.
Essence of the concept
In order to find out what capitalization is, let us turn to the basic values according to the economic dictionary. Interpretation depends on the sphere in which the term is used.
Market capitalization in general form is a determination of the value of all securities and is an indicator of the scale of operations in the stock market under consideration. The term has a similar meaning in relation to an individual enterprise. What is firm capitalization? This reveals its total value. The assessment is carried out on the basis of income, turnover and market price of shares. The process of increasing own funds has the same name. As for the banking sector, here capitalization has a slightly different meaning: joining the interest to the body of the deposit for its further growth.
There are several ways to assess the size and prospects of the company. The main way involves understanding what capitalization is. For the purposes of the calculation, we denote by the letter Q the number of shares of the company in circulation, and P - their market value. In this case, the company's capitalization (K) will be equal to the product of Q and P, or K = Q * P.
Consider how the formula works on a simple example. Suppose we need to calculate the value of the company. To do this, you first need to know how many of its shares are in circulation, and what is their quote on the stock exchange. If Q = 100,000 pieces, P = $ 200.The capitalization estimate shows that the organization can be bought for $ 20 billion. If the market price of shares increases, this figure will increase accordingly.
Information about the cost of commercial organizations, calculated on the basis of the number and quotes of their shares, allows you to combine them into groups, and then analyze the advantages and disadvantages in general. Investors identify the following types of companies: low, medium and high capitalization. The first group is often referred to as new business entities that have not yet managed to conquer the market, or their product is no longer popular with consumers. Their market value does not exceed $ 2 billion. At the same time, it is impossible to unambiguously assign an organization to this group by the stock price, since a small price can be compensated by a large issue of securities. Mid-cap companies are estimated at between $ 2 billion and $ 10 billion. Businesses that cost more than this amount are considered first-class. They are investors in the third group.
Advantages and disadvantages of different companies
Consider the potential investor to extract profits from the enterprises of each group. Buying shares of small companies often allows you to participate in the management and testing of new products, as well as to predict the market response to them. But potentially high returns are always associated with greater risk. First, the price of such shares is often volatile, which makes it difficult to resell them at a preferred price for the investor. Secondly, one cannot expect high dividends from them at once, since all free resources usually invest in growth.
Mid-cap companies are less risky than small ones. They are more likely to survive during the economic recession thanks to substantial sources of funding. On the other hand, it is extremely difficult to determine whether the company has the potential to grow, so in this case, the investor seriously risks buying stocks with a declining quotation. As for first-class organizations, investing in them usually brings a stable, but low income.
Distributing a portfolio among companies from different groups can reduce the risks associated with an unexpected drop in prices for purchased shares. Preemptive investment in securities of first-class companies is fraught with loss of funds, since they often have exhausted the potential for growth. As for the group with a low capitalization, then it is possible both to win considerable money and lose a large amount. Investments in the average total cost of the company should be based on the dynamics and the current stage of development. More promising are manufacturers who have recently entered the market and provide customers with new, useful solutions in their field.