The Most Important Factor When Picking Investments

In the world of stocks and investing, you’ll soon come across a term known as market capitalisation.

It’s arguably the most important factor when judging investments, and your potential returns, so it’s crucial to know:

• What it means.

• How to work it out.

• Why it’s important to understand.

And in this blog, I’m going to help you do just that.

What is Market Capitalisation?

Market capitalisation, or “market cap” for short (I’ll use this from now on) seems like a complex definition, but it’s very simple.

All this means is the value of something.

Typically, this is used in the stock market, or cryptocurrency market, to determine the overall value of a company or crypto project.

If a company has a market cap of $1 Billion, it means this is what the company is valued at, at this current time.

The market caps of publicly traded companies or crypto projects fluctuate all the time, as their shares are constantly being traded, so it’s important to compare market caps over longer period of time.

As of writing this, here are the 10 biggest companies in the world based on market cap.

1. Microsoft — $3.1 Trillion

2. Apple — $2.8 Trillion

3. NVIDIA — $2.2 Trillion

4. Alphabet (Google) — $2.1 Trillion

5. Saudi Aramco — $1.9 Trillion

6. Amazon — $1.9 Trillion

7. Meta (FaceBook) — $1.2 Trillion

8. Berkshire Hathaway — $890 Billion

9. TSMC — $775 Billion

10. Eli Lilly — $720 Billion

It’s also worth noting that all of these companies are larger in value than the GDP of most countries, which gives you an idea of the sheer size of some of these companies.

The Formula for Market Capitalisation

The formula for working out market cap is extremely simple.

It’s:

Share price x number of shares = market cap.

Every company, whether it be public or private, is divided into shares.

These shares make up the value of the company, so, the value of the share multiplied by the number of shares, equals the market cap, or overall value of the company.

So, if a company has 1,000,000 shares at a value of $100, the company is worth…

$100 million.

If the shares lose some value and are now trading at $96, the company is worth…

$96 million, assuming no new shares have been issued.

Pretty simple right?

But, there’s one thing that a lot of new investors are doing wrong, that is costing them a lot of money.

I’m now going to talk about why it’s so important to judge a company and it’s potential returns based on market cap, rather than share price.

Why Market Cap is Important

In order to make an estimate of future investment returns, you need to look at market cap, not share price.

A lot of people fall victim to this investing mistake, especially in the cryptocurrency industry, where they look at the price of a token, and use this as a (wrong) indication of size or value, and upside potential.

I’m going to use Shiba INU (SHIB) as an example.

Memecoins like Dogecoin and Shiba INU are always popping up in the crypto industry, and they give naive investors false hope that they can make $1 million from $10 invested.

Each SHIB token is worth a fraction of a cent. Right now, it’s worth $0.00002.

This gives naive investors an indication that it’s a tiny project, and that because every token is so small, they’re “early” and have the chance to make a fortune.

And when you compare it to a project with a price-per-token of $10, it makes you think that it’s a more attractive investment.

But, you’d be wrong. Why?

Because it’s worth $15 billion. What’s $15 billion? The MARKET CAP.

There used to be a small community wishing SHIB would go to $1 per token, and I remember seeing loads of people tweeting how many millions they’d make if SHIB ever went to $1 per token.

• “I’ll have $10 million!”

• “I’ll have $30 million!”

• “I’ll be a billionaire!”

Remember the formula for market cap? Price x Number of Shares, right?

The supply (number of tokens) of SHIB in circulation is almost…

600 Trillion.

So, if you want SHIB to get to $1, you need $600 trillion invested.

Into a memecoin.

See why market cap is so important?

Price per token doesn’t matter when it comes to upside potential.

The factor that does matter? Market cap.

This is why it’s so important to use the overall value of a business/project, rather than the value of one share/token.

Acknowledging the importance of market cap, over individual share price, could save you thousands.

Thanks for reading! Be sure to subscribe (it’s free!) for more financial wisdom every week.