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Market Capitalization: Types, Calculation and Importance

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Market Capitalization

Market Capitalization Overview

Market Capitalization is basically a metric that is used to measure the size of a company. Also termed as market cap, it refers to the total worth of a company’s all stock price. The stock price or share price per company changes day by day and so does the market cap. Here the total shares refer only to the class A common stocks that are provided to the public investors at an initial fixed price per share. Generally, this initial fixed price is $10 per share (also called NAV) when a private company or a Special Purpose Acquisition Company (SPAC) opens an Initial Public Offering (IPO). The day a company closes its IPO and the total amount of money it collected by offering all the shares (Units) to the public is the initial market capitalization of that company after going public. 

Once a public company is listed on any stock exchange i.e. NYSE or NASDAQ, the trading of shares will start and the price of the share will fluctuate as per the supply and demands of investors. Due to this fluctuation in the share price, the market cap also fluctuates on every single trading day (generally Monday to Friday). 

Calculating Market Cap

The market capitalization of a company can easily be calculated just by multiplying the total number of shares outstanding by the market price per share. 

I.e. Market Cap = Shares Outstanding x share price

Let’s take an example of a SPAC called Digital World Acquisition Corp. (DWAC),

As per this date (9 Dec 2021), SPACrun shows the share price to be $65.42 and as per the 10-Q filing of DWAC, it shows total class A common shares equal to 30,027,234. 

dwac.png

Therefore,

Market Capitalization for DWAC = 30027234 x 65.42 = 1.96 Billion dollars.

Always keep in mind that on each trading day the price per share changes and so does the market cap. Another term we need to know especially for SPACs is that there is not only the trading of common shares but also the options – warrants. SPAC warrants give the investor leverage to buy common stock at a fixed price generally $11.50 per share. Does this mean it has any effect on the market cap? Well not exactly. Although the SPAC warrants trade in stock exchanges, the redemption for the shares can only be done after the merger. If the merger is not completed in a specified period of time, all the investment will be lost but if the merger is completed and redemption is done, the warrants will be converted to the shares and the market cap will fluctuate. This is called the dilution of class A common shares.

Why is market capitalization important?

Market capitalization gives an overview of how big a company actually is. Especially for the public investors, the market cap always plays a factor in whether to invest in that company or not. The bigger the market cap bigger the company, bigger the reputation, lesser the chance of market crash and lesser will be the risk of losing money. While that is not the case for companies having a small market cap. There will always be a risk of a market crash with such companies and investors always hesitate to invest huge funds in such companies. 

Investing in a company having a large market cap does not mean that you will profit a huge amount of money in a short period of time. The stock price value of such companies shows the slow and steady growth and the probability of a huge drop in share price is very less. Companies with a small market cap might show a huge change in the market price of the stock every trading day. Investing in such companies can lead to huge profits or huge losses in a small period of time. It always depends on the word of mouth, sentiments, and rumors that cause the fluctuation in the supply and demand of shares. Also, the knowledge of smart money investment always helps.

Market Capitalization Categories

Market Cap categories generally define the size of a company based on total market value. Also called levels, they are of six types namely Mega-cap, Large-cap, Mid-cap, Small-cap, Micro-cap, and Nano-cap. All of these levels give us an idea of what range a company’s market cap belongs to. Companies with a market cap above 200 Billion Dollars belong to Mega-cap whereas companies with a market cap below 50 Million Dollars belong to Nano-cap which also refers to “Penny Stocks”. Companies like Meta (Facebook), Amazon, Apple, Alphabet (Google), etc. are some of the popular Mega-cap companies. Investing in these companies or other companies with Large-cap or Mid-cap is less risky and gives you a steady revenue over the long course of time. Companies with Small-cap, Micro-cap, and Nano-cap give you an opportunity to earn more revenue in a short period of time but that also comes with a risk of losing a lot of money. The market capitalization of most of the SPACs falls in the category of either Micro or Small-cap but some SPACs such as PSTH, DWAC etc reached to Mid-cap. The table below shows the range of market cap for each level:

Market Cap categories

Categories Market Capitalization
Nano-cap < 50 Million Dollars
Micro-cap $50 M – $300 M
Small-cap $300 M – $2 B
Mid-cap $2 B – $10 B
Large-cap $10 B – $200 B
Maga-cap > 200 Billion Dollars

To view the market capitalization of all the SPACs and to analyze the market performance you can use a SPAC analytics tool like SPACrun. SPACrun is a definitive SPAC analytics tool that has features like Reddit sentiment analysis, NAV calculator, real-time alerts, de-spac news, and more. Subscribe to SPACrun to get a free trial.

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