The market cap is one of the metrics most overlooked by new traders, but it can offer some valuable insight.
It can be scary taking on a new investment, especially if it’s in a new field. There’s a lot to learn and no one wants to risk losing their money on a failed experiment.
For most of the history of the stock market, the only way to gain any experience was to buy a few stocks and see what happened. Maybe they did well, maybe not. But—hopefully—you learned something along the way.
Fantasy finance contests are a new way for potential investors to get some practice at reading the markets and making trades without the need for an upfront investment.
Fantasy finance platforms like StockBattle or Investor allow people to learn about things like market caps, short vs long sell, and more.
What Is the Market Cap?
The Market Cap on the Stock Market
The market capitalization index—often simply referred to as the “market cap”—is the total value of all the shares of a particular company that are in the market.
The market cap of a stock is calculated by multiplying the price of that stock (at the most recent market closure) by the number of shares in the market.
What does that mean? Well, as an example, Company X has 200,000 shares of stocks. If each share sells for $50, then the total market cap is one billion USD.
Here, we see that Amazon has roughly 506 million shares that exist in the market.
https://ycharts.com/companies/AMZN/shares_outstanding
Amazon is currently trading at around $3,370
Multiplying these numbers gives us the total market cap of Amazon – about 1.75 trillion USD.
This can give people a much better idea of how much total value has been put into a company than just looking at the stock’s price.
The Market Cap and Cryptocurrencies
Since there is no “closing bell” for online crypto trading, the market cap is calculated slightly differently.
To get the market cap of a cryptocurrency, all you need to do is multiply the current price by the current circulating supply. So, just like with our Amazon example above, let’s look at the biggest cryptocurrency out there, Bitcoin.
Here, we can see the price of a single bitcoin as well as the total market cap. Some quick math tells us that there should be about 18 million bitcoins at that rate.
https://coinmarketcap.com/currencies/bitcoin/
Looking here, we can see that that is, in fact, the amount we see.
When we’re talking about market caps, we can split them into three categories based on their size: small, medium, and large. The definitions for these are different based on whether we’re talking about stocks or cryptocurrencies.
Market Cap Sizes for Stocks
Small-Cap
Small-cap companies are defined as having a market cap of between $300 million and $2 billion.
These are usually newer companies that are not yet fully established on the market. Small-cap stocks typically deliver above-average results when looked at as a group over the long term, however, many go belly-up in less than a year.
These are best held as a diversified group for a multi-year investment.
Medium-Cap
Medium-cap stocks have a market cap of between $2 billion and $10 billion These are usually already-established companies whose sector is undergoing a shift or expansion.
Medium-cap stocks include companies like Foot Locker, TripAdvisor, and GameStop. These may be growth stocks but are often less volatile than small-cap stocks. Medium-cap companies are typically established and well-proven in their track records.
Large-Cap
Large-cap stocks are typically nationally recognized brands with a long history of paying dividends. Large-cap stocks include companies like Apple, Amazon, and Coca-Cola.
These stocks represent the pinnacle of stability, however, they often provide limited growth potential.
Market Cap Sizes for Cryptocurrencies
Small-Cap
These currencies have less than $1 billion in market cap. They represent the largest risk as small cryptocurrencies can go belly-up overnight.
However, as seen with coins like DOGE, they can also present rapid, exponential growth. Small-cap investments can be a great choice for long-term investments if you can stomach the short-term volatility.
Medium-Cap
These are cryptocurrencies with a total market cap of between $1 billion and $10 billion. Coins such as XRP, LTC, and BUSD are all medium-cap coins. These typically represent a somewhat safer choice with more long-term potential. This is often a “make or break” point for many coins.
Large-Cap
Cryptocurrencies with more than $10 billion in market cap are said to be “large-cap” currencies. Large-cap cryptocurrencies include BTC and ETH; these represent the most stable choices, however, they do not typically present the chance for short-term gain and can be quite volatile on the day-to-day market. However, they do continue to trend upward over the long haul.
Which is Better?
This is a question with no easy answer. Which option is best for anyone depends largely on their wants and needs. For example, a company with a large market cap is more likely to be able to acquire new financing and secure better deals with banks. Further, they are more likely to be able to weather a downturn in the markets or unforeseen changes in the world.
However, the larger a company becomes, the harder it is for it to make meaningful growth. Sure, Apple stock is going to rise, but will the amount it increases be worth the time and investment in the short-term? Probably not. Since fantasy trading contests typically last anywhere from 15 – 60 minutes, it’s probably best to go for something with a bit more volatility. Medium-cap businesses offer the best value for many short-term choices, but a low-cap stock might just be the next breakout success.
Thanks to its simplicity and effectiveness, the market cap can help you to keep a properly diversified virtual portfolio and help you to determine which stocks or coins you might be interested in.
The market cap can give us a great insight into the overall value of a stock or cryptocurrency.
It reflects the general attitude that investors and the market have in a given commodity with a higher cap being indicative of both public trust and financial stability.
Broadly speaking, a lower market cap will have a lower cost and a higher risk with the potential for a higher return. In fantasy finance contests, these may represent a more appealing choice than many larger businesses.
While the market cap is a pretty quick and easy guide to a stock’s overall value, it’s not the only important metric by which we should be judging stocks.
It is very important to remember that the market cap of a company is not the same as the equity of that company.
The market value of a company is not actually based on the company’s value (assets, debts, etc.) but is only a representation of what people think the company is worth.
Only a truly thorough investigation of the company can tell you what it’s really worth. Shares of any company are often over- or undervalued by the market.
This means that the market price determines only how much the market is willing to pay for its shares, not what they may actually be worth.
The market cap of a stock or coin is largely fairly stable. But that doesn’t mean that it’s set in stone. Any significant change to the price of an individual share will affect the market cap—either up or down.
Likewise, the issuance of stock warrants can affect the market cap by increasing the total number of outstanding shares.
However, the market cap isn’t normally affected by a stock split or dividend. For example, in a 2-for-1 split, the price of a single share will be halved, but there will now be twice as many shares, resulting in the market cap being unchanged.
Although the number of outstanding shares and the stock’s price change, the company’s market cap remains the same. The same applies to dividends.
If a company issues a dividend—thus increasing the number of shares held—its price usually drops, leaving the overall market cap unchanged.
So, now that you know a bit more about how to read the market and pick a stock, why not try your hand at fantasy finance? Fantasy trading contests like StockBattle, Investr, or Wealthbase all offer users the chance to earn real money by putting their expertise to the test.
In just 15 minutes, you can test out your analytical prowess against real-time NASDAQ data by picking a fantasy portfolio of up to five stocks or cryptocurrencies.
All users earn points based on how well they do and can trade these in for real prizes. There’s never been a better way to learn about stocks than by giving a risk-free try yourself.
The post appeared first on Coinpedia
