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How Important Is Market Capitalization?

Almost every company needs fresh capital now and then to grow and take advantage of new business opportunities. This can be the establishment of a new production facility, personnel expansions or new branch offices in still untapped regions. In principle, there are two options available: The company can borrow money, or it can raise funds through investors by selling company shares in the form of stock.

Anyone who owns a share is a partial owner of a company and acquires a claim to a share of the assets and profits. Small shareholders rarely feel like owners, and their influence on the direction of the company is, in fact, nonexistent. Nevertheless, it is ownership that gives a share its value. If shareholders had no claim on the profits, the shares would be worth no more than the paper they are printed on.

Shareholders can choose from thousands of stocks, so they mostly categorize based on company size, company value and industry. Company size influences the potential of market capitalization, which in turn is the total value of all listed shares of a corporation. Market capitalization is determined by multiplying the share price by the total number of company shares freely outstanding. This gives an investor a good idea of the company’s value. For example, if there are 200 million shares of a company in circulation and the share price is 100 euros, the market capitalization is 20 billion euros. In this case, an investment of 20 billion euros would theoretically buy up the entire company.

Large corporations attract investors with their security and stability, but because of their size and long history they are often active in markets that are already largely saturated and then show little growth potential. Pay attention to this when you buy shares.

In the long run, companies with a lower market capitalization show the greater growth. Increasing sales and profits is easier when you start with 20 million instead of 20 billion. Once a young company becomes more profitable and dynamic growth begins, it pulls the stock up with it. However, there is a downside: startups often do not yet have solidified management structures, need to realign more often, and are more susceptible to internal and external turbulence that can jeopardize successful rooting in the market.

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