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The Importance of Market Cap
Friday, August 17, 10:19 AM ET

Many "beginner" investors will look at one stock trading at $10 and another trading at $20 and think the latter company is worth twice as much. Of course, that is a completely meaningless comparison without knowing how many shares of each company exist.

Enter "Market Capitalization" or "Market Cap" for short, which factors in the share count and multiplies by the current stock price, allowing for a true look at the value attributed by the stock market to a given company's stock.

A company's market cap could determine which types of investors the stock attracts. For instance, a mutual fund that is focused solely on Large Cap stocks may for example only be interested in those companies sized $10 billion or larger. A company's market cap can make it ineligible for certain ETFs as well. For example, the S&P MidCap ETF (AMEX:MDY) essentially takes the S&P 500 and then "tosses out" the biggest 100 companies so as to focus solely on the 400 smaller ones.

So a company's market cap, especially in relation to other companies, carries great importance, and investors should understand and follow this important data point.

For MarketNewsVideo.com, I'm Sayoko Murase.

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