What is capitalization is something that any investor must know, whether professional or not. This is a concept that plays an extremely important role for a person operating in the business field whose objects are joint stock companies. So what exactly does this term mean and how to apply the concept to the investment process?

What is market capitalization? Why should investors know about market capitalization

What is capitalization?

Before going to explain clearly what capitalization is, VSM will give you the formula for calculating market capitalization. All three factors in the above formula are determined at the time of calculation, current in the market.

Capitalization = Stock Price x Number of Shares

Looking at the formula, you must have somewhat understood the concept of what capitalization is. In the simplest terms, capitalization is the total share structure of a business at the present time. That is, if you know the capitalization, investors will know how much money they will have to spend to buy a certain company when there is a need.

Capitalization is the basis for investors to decide to put money into certain companies
Capitalization is the basis for investors to decide which company to put their money in there

This is an extremely common concept in business and almost everyone entering the investment market knows it. This is the basis for you to determine how much this business is worth, whether large or small, and consider spending.

Capitalization is closely related to the type of shares that a business issues. Institutions that operate with only one class of stock are called billable capital companies. Institutions that have more than one class of stock are called structured capitalization companies.

What is the meaning of market capitalization

It is no coincidence that the concept of what capitalization is plays an important role for both businesses and investors. This is a factor that you must consider when you have a need to pour money into a certain company. Because capitalization clearly shows how large this organization is, how many or few shares are outstanding, how high the price is. A higher stock leads to a higher capitalization and shows that the company is performing well.

The higher the capitalization, the more trustworthy the business
The higher the capitalization, the more trustworthy the business

Market capitalization is the basis for you to assess the potential when investing in a certain business. For example, for a business with an average capitalization that increases over time, it means that the position in the industry is very high, if you pour money into it, it will be easy to make a profit. This is also an issue that any investor is aiming for, and the immediate profit value is the reason for them to decide whether to jump into the organization or not.

Companies with high market capitalization will often have good growth rates, strong and reliable positions. Liquidity risk if you invest in these institutions is also lower. If you have a need to divest quickly, you can do it right away without much cost.

Separate market capitalization and equity

Often, non-specialist investors will get confused between market capitalization and equity. This greatly affects the assessment of a business as strong and growing or not. Enterprises with high equity are not necessarily good growth units, should invest. In contrast, organizations with low equity but operating effectively can still pour money safely.

Capitalization allows investors to evaluate the business
Capitalization allows investors to evaluate the business

The biggest difference between what is capitalization and equity is the intended use. Market capitalization is the basis for you to evaluate the size of the business, whether it is large or not, reliable or not. The capitalization depends on the number of shares and the outstanding share price, so it is subject to fluctuations in the stock market. Therefore, it is not a fixed level, it will change over time.

On the contrary, the owner’s capital will not be volatile, regardless of any factors. It is the amount of money that the founder of the company spends to build and develop the business. Therefore, investors often rely on this to calculate the real value of the business if there is a need to become a major shareholder. It also shows how much current institutional assets are in order to calculate the risk of withdrawal.

Classify businesses by capitalization

Surely through the sharing above, you have understood what capitalization is and what it means. To have more basis for investing in an organization, you need to know how to classify businesses based on this concept. Specifically, there are types of capitalization corresponding to each business size as follows:

Microcaps 

This is a group of Microcap businesses – with a super small scale, low share price and also few shares in circulation on the market. These businesses may have too low investment capital or are operating inefficiently, competition is too great, niche business. The risk of investing here is very high, so you should consider it.

Microcap businesses are rarely chosen
Small-cap businesses are rarely chosen

Smallcap 

This is a Smallcap business – small in size with a small number of shares or a low share price. These companies are having bad business performance, not very profitable, and investing in is quite risky.

Capitalize 

This is a group of Midcap enterprises – medium-sized with an average number of issued shares, and a mid-range stock price. This group is mainly businesses that have not been noticed by the market and are trying to increase market share and increase competitiveness.

Large-cap

Referring to the concept of capitalization, it is impossible to ignore these large-scale enterprises – Largecap. These institutions are often known for having extremely high stock prices along with large amounts of outstanding shares. The scale of the business is therefore also very large, trusted and highly appreciated by consumers.

Investors often tend to choose large-cap companies to pour money and increase profitability. The names that are receiving the most attention today can be mentioned as FPT Retails, Vinamilk, Vietcombank,…

Vinamilk is one of the large-cap companies
Vinamilk is one of the large-cap companies

What investors need to know when learning the capitalization of businesses 

Understanding what capitalization is and mastering its role is the way for you to make the best investment decisions. This investing strategy will give you the opportunity to get high profits, creating an advantage later on.

According to the latest statistics, the current trading value of stocks is mainly concentrated in large stocks – coming from largecap enterprises. They include 30 groups of stocks, have high prices and attract millions of people to put their money in. However, you should still learn carefully instead of just following the crowd without the necessary information.

Investors can use a number of reliable market analysis tools to evaluate a business and consider whether or not to invest. Every organization will have one or more limitations and you must not ignore it. You definitely must not choose businesses with less transparency, unclear financial statements.

To ensure you make the best investment decisions based on capitalization, you should consider the following factors:

  • Time to invest;
  • Risk tolerance (inherent budget);
  • Financial goals.

Above are the most detailed information about what capitalization is and its importance to the investment process in the market. Hopefully with these shares, you will know well about the terms mentioned and make the most accurate capital investment decision. Good luck!