You may have heard of companies being categorized based on their "market cap." But what exactly does this mean? Market capitalization, or market cap, is the total market value of a company's outstanding shares. Since stock price sometimes misrepresents a company's actual worth, the market cap is useful because it allows investors to gauge a company's size and weigh the potential risk and returns.
Market capitalization is used to divide the stock market into three categories:
• Small cap are smaller companies that have a market cap of less than $1 billion. These companies have a lot of potential for growth and profitability, but they are riskier because they are more likely to default when there's a downturn in the market.
• Mid cap companies have a market capitalization of between $1 billion to $5 billion. These companies carry less risk than small cap, but they do not have the same potential for growth.
• Large cap companies have a market cap of $5 billion or more. These companies have the least amount of risk because their financial resources allow them to survive a market downturn, but they have less room to grow so returns may not be as high.
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