Monday, February 4, 2013

What is the Best Stock Market Capitalization to Include in Your Portfolio?

Companies can make their stocks go out listed for public trading. This is when they enter the stock market. But how do they determine the value of their stocks? This is through limits and identification of the capitalization.

In this article, we will focus the discussion on the different stock market capitalization. Which one among them are best to include in your stocks portfolio?

Definition of Stock Market Capitalization

Market Capitalization, or "market caps," is the total value of the company's shares. This value indicates an estimate of the company's worth in the market. To go for standard computation, you can determine the market capitalization of a company by multiplying the number of its issued outstanding shares and the company's net asset value. So gotta consult your accounting department here to check your books.

If you are not decided to list your company for the stock market, it is also ideal to know about your market capitalization. This is because business investors and financial analysts often assess your company's stock value not on your total sales and assets but on your stock market capitalization.

Capitalization Limits

Now that you are aware of how the capitalization value is derived, the next step is to define the category of your caps.

Each stock market index provides its own limitations to categorize whether your company's stock market capitalization fall on large, mid or small cap. But generally, market capitalization work in the percentile system (in dollar values) to make them standard across different regions in the world.

Large Caps, Mid Caps and Small Caps

When there's economic hiatus and political turmoil, the stock market does not get away with being affected. Volatility is much considered in the stock market.

Guess which among the large, middle and small caps is least volatile. If you think it's the small caps, you guessed it right!

Small Caps Stocks

Since the range of small cap companies' market value only spans from $1B and below, they have very high risks for investment. But they also have the most potential for growth, because it's like a "baby." Small cap companies are usually those which are newly established or those which have just suffered from a company loss.

Mostly, stock market investors who would include small caps in their portfolio are adventurous and high risk-takers. They are people who have a large appetite for large profits and are not afraid to lose money at the same time.

Large Caps Stocks

When the country is in economic crisis, it is best to buy stocks which are of large capitalization. These are the companies which have market value of more than $10B. Yes, every unit of stock is really expensive. But think of earning profits from large caps stocks in a long term view. They can be good already for your retirement plan.

Mid Caps Stocks

Half way in between small and large, we have the mid caps stocks which encompass company market value between $1B and $10B. Most investors own stocks that are in this market segment. Companies that have mid caps stocks have less probability of getting sunk; they also have medium probability of soaring high. This is just a safe place and best for those who want to monitor the stock market trends regularly.

The Verdict

Depending on your investment capability and financial goals, you may invest in either one or all these market capitalization. I also suggest to strike a balance of three three stock market caps to maximize the chance of being profitable and minimize risks.