Market Capitalization & How Teenvestors Can Use It To Pick Stocks

Market capitalization (or market cap) gives you an indication of the size of a company. It is the number of shares held by the public times the current stock price. Mathematically, it is represented as follows:

Market Capitalization = (# of Shares) x (Current Stock Price)

As you can see from the above formula, the market cap of a company changes as its stock price changes. You can get the market capitalization of a company from a financial website such as Yahoo Finance once you have the company's stock symbol (which you can also get from Yahoo Finance). At the time of this writing, the market cap for PepsiCo, Apple, McDonald's, and Merck were as follows: 

PepsiCo (Stock Symbol: PEP) – $145.52 Billion
Apple (Stock Symbol: AAPL) – $634.77 Billion
McDonald’s (Stock Symbol: MCD) – $98.57 Billion
Merck (Stock Symbol: MRK) – $143.79 Billion

Investors typically use the terms mega-cap, large-cap, mid-cap, small-cap, micro-cap, and nano-cap to classify the size of companies. There are no clear-cut numbers for determining whether to classify a company in one category or another. The Motley Fool, a company that runs a popular investment website, suggests the following classification for the market cap of companies:

Nano-cap: Market cap less than $50 million
Micro-cap: Market cap between $50 million and $250 million
Small-cap: Market cap between $250 million and $2 billion
Mid-cap: Market cap between $2 billion and $10 billion
Large-cap: Market cap between $10 billion and $100 billion
Mega-cap: Market cap greater than > $100 billion

We recommend that beginning Teenvestors start with large-cap or mega-cap companies because their stock prices don’t go up or down as much as the stock prices of smaller companies. The general rule is that the bigger a company is, the less the stock price will move up or down. The U.S. stock index, the Dow Jones Industrial Average (the Dow), consists only of large-cap or mega-cap stocks, which generally have stable prices over a short period of time. But of course, stable prices also mean that the stocks in the Dow don’t appreciate quickly either.

Occasionally, large-cap stocks can go bust such as was the case in 2009 when General Motors – a company that was over 100 years old – filed for bankruptcy protection and was subsequently bailed out by the United States government. Over a long period of time, however, large-cap or mega-cap shares generally do well except perhaps under the worst of economic circumstances.

After getting your feet wet with large-cap or meg-cap companies, you can also try companies in the higher range of the mid-cap classification (i.e. market cap of $10 billion and above). We recommend that you stay away from small-caps until you’re really good at doing company research (which might be three or four years from now).

Under no circumstances should you invest in micro-cap or nano-cap stocks (which cover stocks known as penny stocks). Some beginning investors find penny stocks attractive because they can be bought for a few dollars per share, or even for pennies per share. But these stocks are extremely risky; it is difficult to get reliable information about the companies that can tell the investor whether their stocks are good investments or not. In fact, these types of stocks are open to fraud by brokers for reasons that are beyond the topic of this book. To put it plainly, there is a good chance you will lose your money with penny stocks unless you really know what you are doing and you have a reliable source of legitimate company information.