How Does the Market Cap of a Company Affect Its Stock Price?
The word market cap comes from the term capitalization, which is the sum of a company’s stock and the balance of its outstanding debt. It is the market value of the company as a whole rather than the price per share that can be bought or sold.
If you have ever studied the price of the currency of a country, you are probably familiar with the phrase cryptocurrency market cap. This is a better indicator of how much value a cryptocurrency has as opposed to a regular company stock. The most well known cryptocurrencies include Bitcoin, Litecoin, Peercoin, Namecoin, Ripple, Feathercoin, Storjcoin, and Peerplays.
Coins that are not yet established may start out high, but then become worthless or lose value for some reason. A cryptocurrency’s market cap, or its worth as a whole, is usually affected by several factors, including its popularity and the volatility of the currency.
Now you might ask, what does this have to do with a stock price and its market cap? Well, it all has to do with how investors feel about the market in general and the company in particular.
Generally speaking, investors will follow the general trends of currency value and buy when the currency goes up and sell when it goes down. This means that if a company’s market cap increases dramatically (meaning its share price increases) then investors can get a return on their investment within minutes while other stocks take days to go through the increase.
This is why it is important to be aware of any upward trends and to also watch for any trends during the current bubble cycle. Because when the bubble bursts, so will the market cap.
As an investor, it is good to understand the market cap and compare it to the price of the company. It is helpful to consider how the prices of similar products will change over time.
To simplify things, imagine that you want to buy into a currency. Say you have a friend who is familiar with the market and he tells you that it will grow over the next few months.
Your friend is correct, because he has known of this currency and how it changes. You then invest in a currency of this company as a small part of your overall portfolio.
Once the currency starts to rise in value, you sell out of your position and purchase another one for the same amount that you sold before. This is a strategy known as buying low and selling high.
This same approach can be used when looking at the currencies of companies that have experienced a recent inflationary trend or are in the midst of a current bubble cycle. The return on your investment will increase over time, while other companies fall.
Another thing to consider is whether or not the company will hold on to its market cap after this trend ends. If it does, you will be able to profit from the situation because the price of the currency you bought at will be higher than the value of the assets you purchased.