There’s been a lot of talk in the media about market capitalization or market cap. Tesla recently hit $1 trillion. Google (Alphabet) is dancing around the $2 trillion mark, and now the Crypto market has reached the $3 trillion milestone.
So why is market cap important? Can the market cap size influence how you trade? The answer is a very strong yes. In fact, market cap should be taken into account when choosing your leverage, your take profit/stop loss, and your overall profit expectations.
Market cap or market capitalization is the total value of a company. Let’s create a company and launch an IPO (Initial Public Offering) on the stock market to demonstrate. MarCap opens with 1 million shares, priced at $10. If you wanted to buy every available share, you’d need $10 million.
That’s the market cap. Simply, the number of shares available multiplied by the current price. But what pushes that price? It’s not the size of a company.
When a lot of stock traders express an interest in something, the sellers feel justified to raise the stock price. Likewise, if interest in a particular stock is low, the sellers are often forced to sell at a lower price. If market sentiment for a particular instrument is high, the market price will rise, and so will the market cap.
A small market cap means large volatility. It’s the same principle as diversification. If you invest in multiple assets over several asset classes, you effectively spread out the risk.
Similarly, if the financial health of the company is tied to a small number of shares available to the public, even a slight change in investor sentiment can affect the share price drastically. A larger market cap instrument will show greater price stability over the long run.
Even though Tesla and Google both have high market caps, it doesn’t mean that you can expect growth potential and price stability in 2022. Whenever a market cap doubles or triples in a single year, it means the sentiment and public interest is spiking, and prices are reacting to A hype.
This is even more true for Bitcoin and the cryptocurrency markets. As with prices, sentiment can shift rapidly, and the market cap will follow. Set leverage with caution, and make conservative forecasts based on common price ranges when setting stop loss and take profit. Big market cap doesn’t always mean low volatility, no matter what everyone says.