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When investors talk about how big a company is, one of the first numbers they look at is its market capitalisation, or market cap. In this edition of Wiser Wealth, we break down what it really means, and how it actually works.
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Put simply, market cap represents the total value the share market is currently placing on a company. It is calculated by multiplying the company’s current share price by the number of shares on issue.
That calculation is simple, but market cap can be an important starting point when comparing companies.
Market capitalisation is commonly used to separate companies by size, from the largest listed businesses through to mid-cap and small-cap stocks. Smaller companies can attract investors looking for stronger growth potential, while larger businesses may offer greater scale, established operations and deeper liquidity.
But size alone does not determine whether a stock is cheap or expensive.
A company with a $1 billion market cap is not automatically a better opportunity than one valued at $10 billion. Investors still need to consider factors such as earnings, revenue growth, debt, cash flow, assets and the outlook for the business.
For a full breakdown in layman’s terms, watch the full video above.
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The material provided in this article is for information only and should not be treated as investment advice. Viewers are encouraged to conduct their own research and consult with a certified financial advisor before making any investment decisions. For full disclaimer information, please click here.
