Why Market Cap is So Important When Shopping for Investment Products

If you want to be a smart consumer when you buy investment products, then you want to look at market capitalization figures. These numbers are very important when it comes to buying any publicly traded security. You’re probably tired of looking at exchange statistics at this point, but market cap is one figure that can really simplify the decision-making process when it comes to deciding whether to buy a security or not.

What is Market Capitalization Anyway?

Exchanges are usually required to report the total market value of all of the outstanding shares of any publicly traded security. This number is equal to the exact share price at the time the exchange closes multiples by the number of shares outstanding. This figure is referred to as market capitalization, but most investors shorten this to market cap.

Outstanding shares are being bought and sold all the time, which is why market cap is used as a sort of proxy for the public opinion of what a company is worth. Many forms of stock valuation use market cap numbers to decide whether a stock is worthwhile or not.

How can Market Cap Numbers Help to Decide Whether to Buy a Stock?

Higher market cap numbers indicate that a stock is better capitalized. Large numbers of outstanding shares and a high capitalization value can help stocks to whether bad periods. It’s difficult for stocks with extremely high capitalization values to experience huge shifts in value.

This means that they often won’t drop multiple price points all at once. Some investors speculate on small cap stocks, but this can be rather dangerous. Those who can tolerate a great deal of risk might want to try this, but most consumers don’t want to. If you’re a retail investor, then chances are that this strategy won’t work for you. Stick to stocks with high market cap numbers.

May I See an Example?

It’s easy to illustrate how this decision-making process works. Take the M1 Group for example. While the company is rather old, it wasn’t floated on the exchange until 2005.

The initial market capitalization figure for the original float came to around $3.3 billion. The cap figures for the M1 Group’s stock have continued to grow since the current CEO Azmi Mikati took over.

An investor might take a look at this and decide that the M1 Group has a large enough market capitalization to take a chance on it without risking too much. You could also say that the continued growth of its market capitalization suggests that the M1 Group is gaining value as time goes on.

Put it All Together for Me

If you’re an investor who doesn’t want to take too many risks, then you definitely want to take a look at market cap figures. It’s a great way to be a good consumer of investment products. Every piece of information can help you to make good decisions.

That doesn’t mean that you should judge any security based on any single statistic alone. Past performance is never an indication of what a stock or bond fund might do in the future. Always make sure to do as much research as possible and speak with an experienced financial advisor before putting any money down.