Market cap is calculated by multiplying the market price of stock by the number of issued shares of stock. Traditionally, companies are divided into small, mid and large cap.
Making an investment decision
A few questions should immediately come to mind before making an investment decision:
1. What is the total market for this given service or product? Novice investors might be surprised to learn how frequently a company over-estimates the total demand for a given product. This is particularly true with new and/or un-proven technology.
2. What is the anticipated penetration level? It doesn’t matter if Company X is the only one today…it still can’t expect 100% market penetration because as soon as they become profitable, copy-cat companies will move in.
3. Does the market capitalization level reflect the actual opportunity? For example: company ABC operates in a $6 Billion dollar industry within the health care arena. The IPO was $50 million and they were quickly listed on NASDAQ. Closer scrutiny reveals that the subindustry within which they operate is only a $40 million dollar annual industry. While it is true the industry is shifting toward the new technology, due to regulatory and insurance reimbursement schedules, that shift will require major overhaul and recognition before going mainstream.
In order to make an educated investment decision, you will surely need to factor in the market cap.
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