As from the last few days I have been more vocal about market capitalization. Ever wondered why? | Arshnoor Singh

As from the last few days I have been more vocal about market capitalization. Ever wondered why? Why there's an importance of Market Capitalization?

Some traders and investors, mostly novices(an inexperienced one), can mistake a stock's price to be an accurate representation of that company’s worth, health and stability. They may perceive a higher stock price as a measure of a company’s stability or a lower price as an investment available at a bargain.

Stock price alone does not represent a company's actual worth. Market capitalization is the correct measure to look at it, as it represents the true value as perceived by the overall market.

For instance, Microsoft with a stock price of around $300 per share had a market cap of $2.3 trillion as of Q2 2022 While Berkshire Hathaway (BRK.A) with a much higher stock price of more than $50,000 per share had a lower market cap of $761 billion(Similar in Indian market HDFC has more market cap with share Rs.1650 as compared to MRF which has Rs.69,780).

Comparing the two companies by solely looking at their stock prices would not give a true representation of their actual relative values.

With billions of dollars worth of valuation, a large-cap company may have more room to invest a few hundred millions in a new stream of business and may not take a big hit if the venture fails.

Whereas a mid-cap or micro-cap company making a similar value investment may be susceptible to big blows if their venture fails as they don’t have that bigger cushion to absorb the failure.

So, while investing in any stocks one must know the market cap of the stocks they are investing in.