In order to create an investment strategy that helps shareholder or trader pursuing long-term financial aims, understanding the relationship between company size, return potential, and risk is essential. With that knowledge, shareholder or trader will be better prepared to build a balanced stock portfolio that comprises a mix of “market caps.”
Market cap — or market capitalization — refers to the total value of all a company’s shares of stock. It is calculated by multiplying the price of a stock by its total number of outstanding shares. For example, a company with 20.0M shares selling at $50 a share would have a market cap of $1.0B.
Why is market capitalization such an important concept?
It allows investors to understand the relative size of one company as compared to another. Market cap gauges what a company is worth on the open market, in addition to the market’s insight of its future prospects, because it reflects what investors are ready to pay for its stock.
- Large-cap companies are typically firms with a market value of $10.00B or more. Large-cap firms often have a reputation for producing quality goods and services, a history of consistent dividend payments, and steady growth. They are often dominant players within established industries, and their brand names may be familiar to a national consumer audience. As a result, investments in large-cap stocks may be considered more conservative than investments in small-cap or midcap stocks, potentially posing less risk in exchange for less aggressive growth potential.
- Midcap companies are typically businesses with a market value between $2.00B and $10.0B. Typically, these are established companies in industries experiencing or predictable to experience rapid growth. These medium-sized companies may be in the process of increasing market share and improving overall competitiveness. This stage of growth is likely to determine whether a company eventually lives up to its full potential. Midcap stocks generally fall between large caps and small caps on the risk/return spectrum. Midcaps may offer more growth potential than large caps, and possibly less risk than small caps.
- Small-cap companies are typically those with a market value of $300.0M to $2.00B. Generally, these are young companies that serve niche markets or emerging industries. Small caps are considered the most aggressive and risky of the three categories. The relatively limited resources of small companies can potentially make them more susceptible to a business or economic downturn. They may also be vulnerable to the intense competition and uncertainties characteristic of untried, burgeoning markets. On the other hand, small-cap stocks may offer noteworthy growth potential to long-term shareholders who can tolerate volatile stock price swings in the short term.
Now keeping in mind the above information, we will analyze the market value, risk factors and growth potentials of the following two stocks:
- Cemex SAB de CV (ADR) (NYSE:CX)
- Chevron Corporation (NYSE:CVX)
Cemex SAB de CV (ADR) (NYSE:CX) is a large cap company with market capitalization of $13.067 Billion. Beta factor, which measures the riskiness of the security, was recorded as 1.52. A beta of 1 indicates that the security’s price moves with the market. A beta of less than 1 means that the security is theoretically less volatile than the market. A beta of greater than 1 indicates that the security’s price is theoretically more volatile than the market.
ATR value, which discloses information about how volatile a stock is, was recorded as 0.22. A stock undergoing a high level of volatility has a higher ATR, and a low volatility stock has a lower ATR. The ATR may be used by market technicians to enter and exit trades, and it is a functional tool to add to a trading system. It was created to allow traders to more accurately measure the daily volatility of an asset by using simple calculations. The indicator does not indicate the price direction, rather it is used primarily to measure volatility caused by gaps and limit up or down moves. The ATR is fairly simple to calculate and only needs historical price data. Looking deep into the volatility of the stock; it remained 2.18% volatile for the week and 2.38% for the month.
Growth potential is an organization’s future ability to generate larger profits, expand its workforce and increase production. The growth potential generally refers to amount of sales or revenues the organization generates. In the last five years, the company’s full-year sales growth remained over 5.70% a year on average and the company’s earnings per share moved by an average rate of 18.80%.
On other hand, Chevron Corporation (NYSE:CVX) is a large cap company with market capitalization of $198.06 Billion. Beta factor and ATR value is recorded as 1.25 and 1.34 respectively. Looking deep into the volatility of the stock; it remained 0.92% volatile for the week and 1.36% for the month. In the last five years, the company’s full-year sales growth remained over -15.10% a year on average and the company’s earnings per share moved by an average rate of 74.53%.