Why you should be interested in Market capitalization

Latest news reports show that Dangote Cement is the first to hit 10 trillion Naira in market capitalization. Also, Nairametrics posted ten companies with a market cap of one trillion Naira and above. But what is this term and why should you be interested in it? 

Market capitalization explained

The term market cap simply means the total share value of a company in a year. It's the multiplication of the share price by the total unit of shares of a company. If a company unit of shares is 30,000 units and the share price is N50 Naira, the market capitalization will be N1,500,000. 

Why you should be interested in Market cap

The value of a company is easily measured by its market cap. However, it is not the best way of doing so. The enterprise value method is mostly used to value companies. However, the market capitalization value explains how investors see the company in question. Companies with large market caps imply that investors place high value on their stocks and are willing to buy more at any given time. However, this is the opposite with low-valued companies which might be referred to as penny stocks. However, not all penny stocks are low valued.

Market capitalization is usually determined by the forces of demand and supply. The demand side is the investors while the supply side is the availability of shares units of companies. When investors place a high value on a company, it increases the demand side and therefore increases the share price per unit. 

Another way to see this term is on the total company value in a stock exchange market. For example, the market capitalization of the Nigerian Exchange Group (NGX). This is the market cap of all the stocks in the Exchange. The value explains the total market value of the stock exchange. An Exchange with higher value means it is performance better than other exchanges.

Reasons why investors will pick a stock over others

There are reasons why investors will be interested in a particular stock over others. Investors have preferences. While some will prefer growth stocks, others will prefer dividend stocks. In Nigeria, dividend stocks drive the market. And of course, growth stocks are rare in Nigeria. Investors are interested in companies that make huge profits and whose directors are willing and able to declare dividends annually. The higher the dividend expected, the more shares that are likely to be acquired. Thereby, pushing the share price of that company upward as well as its market cap. 

More so, some investors are interested in the capital appreciation of shares in the short run. So, they invest in shares with the hope that the price will fluctuate upward. And they will sell and earn more money from it. Others play the long-term game. Buying shares of trillion dollars with the hope that their share prices will continue in the upward trend.