A stock market cap is not a maximum. The word cap is market jargon for capitalization. Market capitalization is a measure of value for stocks and markets. Understanding market capitalization will give investors additional insight when comparing markets and individual stocks.
The market capitalization of a publicly traded company is the current stock price times the number of shares outstanding. If Google stock is at $425 per share and there are 318 million shares outstanding, Google has a market cap of $135 billion. Stocks are often classified as either large cap, mid cap or small cap. The 100 largest stocks in the United States have an average market cap of $54 billion in mid 2009. The Standard & Poor's (S&P;) Midcap index holds stocks with caps from $750 million to $3.3 billion. Small caps are stocks below $750 million.
Stock markets and stock market indexes are also compared using market caps. The market cap for these entities would be the total of all the individual stock market caps. In July 2009, the S&P; 500 covered approximately 75 percent of the U.S. market value, with a total capitalization of $8.4 trillion. The mid cap 400 stock index is worth $740 billion and the small cap index of 600 stocks has a total cap of $336 billion.
The U.S. stock market is the most valuable in the world with a total market cap in mid 2009 of approximately $10 trillion. In other large markets, China has a market cap of $2.9 trillion. The London stock market is valued at $2.2 trillion and German stocks are worth $1.0 trillion. Back in the Americas, Canada's cap is $1.3 trillion and Brazil has $900 billion of public companies.
Understanding market capitalization is important for investors. The financial news is focused in the few hundred companies with multibillion dollar valuations. There are over 4,000 other companies that you can buy in the mid and small cap arenas. Many mutual funds and exchange-traded funds have market capitalization criteria in their investment goals. Understanding market cap will help investors understand the types of stocks in their fund holdings.
In his book "Stocks for the Long Run," Jeremy Siegel highlights how over different periods of time small and large cap stocks provided significantly different returns. Small cap stocks did better than large companies from 1975 to 1983 and from 2000 to 2006. Large cap stocks were the investments to hold from 1983 to 2000. Investors should be aware of the potential of small companies compared to large ones when they make investment decisions.
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