What You Should Know About Market Capitalization

To determine the market capitalization of any stock, you have to simply multiply the number of outstanding shares by the current market price for one share.

There are a number of tools that are used to determine whether or not invest in a security and one of such is the value of the security itself. While there are various methods to determine the value of a security, a key one is its market capitalization (also called market cap.)

Market capitalization is the total or aggregate market value of a publicly traded company's outstanding shares. To determine the market capitalization of any stock, you have to simply multiply the number of outstanding shares by the current market price for one share. (Share price X number of shares outstanding.)

In other words, a business that has a share price of N20 and 1,000,000, would have a market cap of N20,000,000. What this automatically means is that market capitalization only works well when a company's shares are publicly traded on the Nigerian stock exchange.

Market Capitalization is a term that you cannot avoid seeing in the stock market and the easiest way to understand it is that it is the amount of money that would be required to purchase a company outright, all at once, at a specific period of time as it is largely dependent on fluctuations in share price.

However, it is important to note that the price it is sold at is different from the true worth of the company. The price is what you pay for a thing, but the value is what it is truly worth; in other words, you can either overpay for it or underpay for it depending on the circumstances around it.

There are many things market capitalization does for the investor. For one, it is a tool to determine the public’s perception of the stock. This is also only logical as it is a spin off from the share price. Market capitalization is also used to show the size of not just the company but other wider parts like industries and the stock market itself.

As at 2018, the Nigerian Stock Exchange recorded 169 listed companies with a total market capitalization of over ₦13 trillion. This, of course, helps with rankings as well. Based on market capitalization, the Nigerian Stock Exchange is the second largest stock exchange in Africa.

It can also be used to rank companies into three tiers: Companies/ stocks with large capitalization, medium capitalization, and small/ low capitalization. As such, by determining where the market capitalization of a company falls in relation to the entire market, an investor can determine where it falls on the scale and what to expect from the investment.

Companies with large capitalization are usually steady. They generally have been operating for many years and there are very little fluctuations in share price. The companies are usually large and are key players in their industries as they have spent a lot of time in existence.

Investors would know to expect steady growth, steady dividend payments, and low volatility from these investments.

Medium capitalization companies are not so old, but are not newbies in their industries. They are sometimes in the process of expanding and have amazing growth potentials. Their share prices are consequently not as expensive as large cap companies, making it more affordable to purchase their shares.

As you would expect, the low capitalization companies are much riskier as they haven’t been tested as long in the stock market. They typically have limited resources, are affordable to purchase, could have growth potentials – but could also be mistakes.

To find the market capitalization of any company traded on the Nigerian Stock Exchange, click on any company on the heat map in the Yochaa App and scroll down. With an understanding of market capitalization, you would have greater insight into what stocks you are investing in and if they suit your needs as an investor.

Written by Lawretta Egba.