Market Cap vs. IPOs: All You Need to Know

Posted: 20th November 2020 09:37

Before investing in a company, you need to acquire additional information about its value and returns. Learning about the market cap and IPOs can assist in picking the best company to invest in. Below is all the information you ought to know before making an investment decision.

What is Market Cap?

Also known as market capitalization, market cap indicates the total value of the company’s shares of stock. To calculate the market cap, you will have to multiply the stock price by the total outstanding shares. Market cap, therefore, allows you to measure a company’s size correctly.

When creating an investment strategy, you should consider one that will help understand the relationship between company size, risks, return potential, and long-term financial goals. Attaining this knowledge allows you to understand the market cap better.
The market cap enables you to have a unique perspective on small and large companies. That is, small companies will always have more room for growth. However, they are a riskier investment and business model since they are younger and haven’t yet proven themselves.
On the other hand, large companies have proven themselves, and they have a more mature and stable business. Most of these companies have been through severe business conditions and succeeded. Unlike small companies, their growth is limited since they have taken advantage of most opportunities.
To better understand market cap, look at this quick breakdown of its ranges:

• Micro cap – Between $50 million to $300 million
• Small-cap – Between $300 million to $2 billion
• Mid-cap – Between $2 billion to $10 billion
• Large-cap – Between $10 billion to $200 billion
• Mega cap – Above $200 billion

What Is an IPO?

An IPO is the initial public offering. A process that enables private companies to go public by selling their stocks to the public. All types of companies, new, young or old, can decide to go public by enlisting on the exchange. An IPO assists companies in raising equity capital by issuing new shares to the public.
Having IPO information allows you to avoid slippery legal slopes and understand more about SEC forms insider trading. As an investor, you will, therefore, have the capability of getting on the ground floor of most companies through an IPO. You can buy shares that might skyrocket with time, depending on the company's growth and value.
For most companies, an IPO is exciting. It provides the company with new growth opportunities since it's possible to acquire more capital. In the case of massive company expansions, IPOs can be the best funding solutions. An IPO enables a company to invest in new capital infrastructure and equipment.
It’s easy for a company to attract top talent because it can offer stock options. With IPOs, you will come across different investor categories. These will entail:

• Retail Individual Investors (RIIs)
• Non-Institutional Investors (NIIs)
• Qualified Institutional Buyers (QIBs)

The Essence of Market Cap and IPO for Investors

Understanding market cap and IPO can help an investor know all the opportunities that they might have. An investor can utilize the market cap to know the value of a company before buying any stocks. It's easy to learn about the company size by knowing if they can deliver strong per-share returns.
For an investor, you ought to have a diverse portfolio that entails stocks of all the different market caps. It allows you to tailor the risk levels and your desired returns that will meet your objectives. To have a more stable portfolio, you will need a larger allocation of large-cap stocks.
Large-cap stocks are conservative, thus posing less risk compared to small or mid-cap stocks. Opting for mid-cap stocks can close the gap between large and small-cap stocks since the risk versus return will be in between. For any mid-cap company, it's easier to improve their competitiveness by increasing its market share.

It's easier to track a mid-cap company's progress and know whether it will succeed or fail. With small-cap stocks, the risks are higher since these stocks and companies are susceptible to an economic downturn. They are also vulnerable to uncertainties of untried markets and intense competition.
Learning about the IPO as an investor ensures that you can understand all the contract provisions. For example, if you are an early private investor, venture capitalist, owner, founder, or employee, you must know about the lock-up period.