In the field of business and investment, the concept of market capitalization is mentioned a lot and plays an important role in investment strategy. So What is capitalization?? How is market capitalization determined?
Let’s find out with lamchutaichinh through the content of this article!
Table of Contents
What is capitalization?
Definition of capitalization in accounting
In accounting, capitalization is used in financial statements to refer to the cost of a business’s assets over a specific period of time, including the total value of its stock, long-term debt, and retained earnings. .
Definition of stock market capitalization
Market capitalization is the value of a company on the market in the form of shares. Currently, market capitalization is also used to assess risk, market limits as well as a measure of stock valuation.
In other words, Market Cap is the amount of money spent to buy an entire business at the present time.
For example:
- A business enterprise that has issued 15 million shares
- Each share is sold for 100,000 VND.
So the capitalization of the company will be the capitalization of that business will be 15 trillion.
Roles and tasks of capitalization
Market capitalization plays an aggregate valuation role for a company and is considered an important basis to help investors determine the return, risk in the process of investing in stocks as well as diversifying options. choose the investor’s business.
Capitalization is responsible for updating how valuable a company is when deciding to list shares on the stock market.
What is market capitalization?
Market capitalization refers to the value of a company as determined by the stock market. It is defined as the total market value of all outstanding shares.
To calculate the market capitalization of a company, multiply the number of shares outstanding by the current market value of a share.
Based on market capitalization to divide companies by levels, specifically:
- Large-cap ($10 billion or more)
- Mid-cap ($2 billion to $10 billion)
- Small-cap ($300 million to $2 billion).
Classification of Vietnamese enterprises by market capitalization
In Vietnam, there are 4 basic types of enterprises divided by market capitalization, including:
- Large (Large Cap): Market capitalization > 10,000 billion VND.
- Medium (Mid Cap): 1,000 billion VND < market capitalization < 10,000 billion VND
- Small Cap (Small Cap): 100 billion VND < market capitalization < 1,000 billion VND
- Micro Cap (Micro Cap): Market capitalization < 100 billion VND
However, the above assessment is only approximate.
How to divide the capitalization group in the world
In the world, enterprise capitalization is divided into 6 groups:
- Mega Cap: over 200 billion USD (Amazon : > 700 billion USD, Google > 700 billion USD, Berkshire Hathaway 500 billion USD and many more)
- Big/Large Cap: 10 to 200 billion USD
- Mid Cap: 2 to 10 billion USD
- Small Cap: 300 million to 2 billion USD
- Micro Cap: 50 million to 300 million USD
- Nano Cap: less than 50 million USD
These numbers will also change over time, because the stock market will always appreciate in the long run and the capitalization of companies will grow larger.
What factors determine the market capitalization of a business?
The market capitalization of a business is determined by two factors:
- Stock price
- Number of shares outstanding
Difference between charter capital and market capitalization
The two concepts of capitalization and charter capital often have very clear differences in the financial sector, specifically as follows:
- Market capitalization: is the basis for assessing the development scale of the enterprise. It depends on the value of shares that the business issues on the stock market. Meanwhile, the value of shares on the stock market often has certain fluctuations over time.
- Charter capital (owner’s equity): is the basis to be able to help quantify the true value of the business. Charter capital currently does not depend on the value of shares but it depends on the types of assets of the company. In addition, the equity of the enterprise is not subject to fluctuations over time like the capitalization of enterprises on the Vietnamese stock market.
Difference between market capitalization and market value
Although market capitalization (Market Capitalization) and Market value (market value), both are to evaluate the assets and value of the company.
However, from the perspective of calculation and accuracy, these two concepts have the following differences:
- Market capitalization = number of shares outstanding X current price of a stock. So it depends on the Share Price and the number of shares outstanding
- Market value is also generally used in place of market capitalization in listed companies. (but it is not the same term)
Mistakes of individual investors when investing in Vietnam’s stock market capitalization
For individual investors in the stock market, it is easy to make the following mistakes in the investment process such as:
- Investment plans in the market are not suitable for investors’ knowledge and time periods that individual investors have.
- Not knowing how to select and receive accurate information about businesses. Leads to making wrong investment judgments.
- Not equipped with enough professional knowledge. Especially understanding market capitalization.
- Mentally unstable….
To build a portfolio with a mix of stocks of different capitalization. Investors should consider:
- Financial goals
- Risk tolerance
- Investment time
- Self-knowledge and knowledge
Conclude
What is capitalization? What are the mistakes individual investors make when investing in market capitalization? All have been answered through the content of this article.
Hope to have brought you useful information.
Content edited by: lamchutaichinh.vn
