Stock Market Capitalisation
A measure of company size - and survivability!

What is it? Stock market capitalisation (market cap) is the current share price of a company multiplied by the number of shares issued by the company. It is an indicator of the size of a company.

How do I use it? I generally only consider companies with a market cap greater than $A100M. I multiply this by a factor of 10 for U.S. companies as it is a much larger market.

So when I use a stock market screener to find wonderful (Australian) companies, I use 'market capitalisation greater than $A100M' as one of the filters.

Why do I use it? Some smaller companies below this level don't have five years of financial information to base a valuation on.

Also, companies over this level are better able to absorb shocks that most companies endure from time to time.

However, a negative thing (for me) about market cap is that the larger it is, the greater the number of market analysts who study the company.

Big companies and major banks have a stack of analysts checking and making a share market forecast about them. Consequently, the share price at any time is more likely to reflect, or be greater than, the intrinsic value of the company.

Why greater than? Larger companies tend to be overvalued more often than not because active fund managers generally have buckets of money that have to be invested.

They also need liquidity in their investments when dealing with large sums of money. Larger companies are more liquid. That is, more people are buying and selling their shares.

So fund managers can buy large companies without too much impact on the share price, and also get out reasonably quickly when they want to.

Also, some fund managers are constrained by investment policies that require them to only invest in companies over a certain market cap.

Interestingly, companies in the $A100 - $A500 M stock market capitalisation range commonly don’t have any analysts looking at them. Therefore, there is greater potential that the share price of these companies does not reflect their intrinsic value.

So guess where I find the best investments more often? ..... You guessed it - in the smaller to medium-sized market-cap companies.

And historical studies do show that these smaller to medium-sized companies offer better value. Hence I am more likely to enhance my financial performance by having some of them in my portfolio.

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