Ken Roberts: Market capitalization
Market capitalization is a way of measuring the size of a corporation. Investors should diversify and have exposure to large, mid and small cap stocks in their portfolios. Market capitalization is calculated by multiplying the current price of the stock by the number of shares outstanding.
Generally, small cap stocks have a market cap of $300 million to $2 billion. Mid-caps range from $2 billion to $10 billion and large cap stocks have a market cap greater than $10 billion. There are also categories for very small and the largest companies known as micro caps and mega caps. Micro cap stocks have a capitalization of less than $300 million and the mega caps have market caps over $300 billion. Today there are about ten US companies that have market caps over the $300 billion mark.
There is one company over the $1 trillion-dollar mark right now and that is Microsoft at $1.065 trillion. Apple went over $1 trillion in 2018 but is at $944 billion as of July 15th. Amazon hit the $1 trillion-dollar value today, July 15th but closed slightly lower. Amazon has hit the $1 trillion-dollar point before but then pulled back somewhat. Amazon Prime day has had an impact on the share price of the stock.
Another way of measuring the value of a stock is known as the book value. The book value of a company is basically the price that would be received if the company were to be liquidated. Stocks, especially growth stocks tend to trade at multiples that are much higher than their book value. That multiple is known as the price to book value. Microsoft for example is currently trading at 11.2 times its book value which is 12.37 per share. Growth stocks will trade at higher valuations than value stocks. Investors should have exposure to both growth and value stocks in a well-diversified portfolio.
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If low cost index funds are used for diversification be sure that you have funds that represent the small and mid-cap areas. Also, some mutual funds are weighted by market cap and others are equal weighted. For example, an S&P 500 index fund that is capitalization weighted will give an investor much more exposure to the largest companies in the index than the smaller ones. An equal weighted fund will spread the dollars out evenly. Diversification is one of the best risk management tools that there is.
Kenneth Roberts is a Truckee-based Registered Investment Advisor. Information is at his blog at http://www.sellacalloption.com or 775-657-8065. The mention of securities should not be considered an offer to sell or solicitation to buy investments mentioned. Consult your investment professional to understand the risks and/or how the purchase or sale of these investments may be implemented to meet your investment goals. Past performance is no guarantee of future results.
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