HomeMarket Cap: Definition, Type, and Strategy of Investment Based on Scale

Market Cap: Definition, Type, and Strategy of Investment Based on Scale

It would be best to understand the market cap (market capitalization) for those of you who want to invest. In investing, understanding market capitalization dramatically influences whether or not to invest in the company.

If you only look at the price per share, you could leave a bigger opportunity or even lose money.

For that, HashMicro explains to you the importance of market cap as a better investment reference. After reading this article, the hope is that you can have a good insight into choosing the right investment based on its scale.

Definition of Market Cap

Market capitalization, or simply market cap meaning a company’s total market value. According to Investopedia, market capitalization is calculated by multiplying the total number of shares or shares outstanding in a company by the current market price.

Market Capitalization = Price Per Share × Outstanding Shares

The use of the term market cap for investors is to determine the size of the company.  Market capitalization is useful for calculating the amount of money required to purchase all of a company’s shares.

According to The Balance, the following describes two companies with significantly different stock prices but a similar market capitalization:

Company 1:

Stock price: $50

Outstanding shares: $50 million

Market capitalization: $50 x 50,000,000 = $2.5 billion

Company 2:

Stock price: $10

Outstanding shares: $300 million

Market capitalization: $10 x 300,000,000 = $3 billion

If you only look at their per-share price, it appears that company one is worth more than both companies.

But since the second company has more shares issued, it means that overall, investors rate the company’s shares two higher than the first company.

Factors That Affect Market Cap

You should be aware that certain factors can influence market capitalization.

First, based on the previous calculation method, understand that the market cap is affected by two factors: the number of outstanding shares in the market and the share price.

Thus, it would be beneficial to analyze both of these factors to determine whether the purchase of shares is the best course of action.

Second, market sentiment has a significant impact on how people invest. It would be best if you looked back in time to understand market sentiment.

When Elon Musk, Tesla’s founder, announced that he would no longer accept bitcoin payments for Tesla vehicles, the fearful public sentiment caused the price of bitcoin to fall.

Also Read: Cryptocurrency: Definitions, Examples, Mechanisms

Company Scale based on Market Cap

You already understand that the market cap can judge how big or small a company is.

On international stock exchanges, a company’s value based on the market cap is large if the value is above US $ 10 billion. Furthermore, the market cap is priceless when the value is between US $ 2 billion to US $ 10 billion. If the value is less than $2 billion, it would be considered small.

If the international stock exchange valuation standard is applied in Indonesia, almost all companies are in a medium or small market cap. So that the reason makes the capital market in Indonesia has its size value in determining the market cap value of a company.

Here is the division of three market capitalization groups by the Indonesia Stock Exchange, among others:

Blue Chip – Large capitalization stocks

If the company’s market capitalization exceeds Rp10 trillion, its shares will be designated as blue chips. This is a significant amount for businesses in Indonesia.

Companies that become blue-chip companies are famous for their more stable financial performance. Bank Central Asia Tbk (BBCA), Unilever Tbk (UNVR), Astra International Tbk (ASII), and many others are examples of blue-chip companies in Indonesia.

Investors generally prefer the blue-chip type because of its lower risk profile. In addition, most investors like blue-chip stocks because they consistently pay dividends.

Blue-chip or big-cap companies also have stronger fundamentals and higher profit potential. In general, the products or services that the company sells have very many customers.

Second liner – Stocks with medium-capitalization

The second liner or Middle caps are located in the second row under the blue-chip. The second liner is mentioned because of its position below the blue-chip line (big cap).

The stock market capitalization ranges from Rp1 trillion to Rp10 trillion. Companies in this category are not as big as blue chips. However, these second-tier stocks are attractive enough to be an investment portfolio because the profits are no less large.

Usually, these second-liner shares contain issuers or emerging companies. If blue-chip companies are more stable with conservative profit growth, then second-tier companies have the potential to become more aggressive (certainly more risky).

Third liner – Small-capitalization stocks

The last sequence has a mention of a third liner. This group has a smaller market capitalization rate than blue-chip or second liner companies. For that reason, this row of shares is often referred to as small caps.

This category of stocks with a small market capitalization has a market capitalization value below Rp1 trillion. Although the stock price of a company with a small market capitalization is usually quite cheap, these small-cap issuers still have the potential to get into your investment portfolio because of the ease with which the bookie can play price movements.

Bonus Tip: If you want quick and momentary profits, these small-cap stocks can be an option because it’s easy to play price movements.

Source: ma.uma.ac.id

List of 10 Companies with the Largest Capitalization on the Indonesia Stock Exchange (September 2021)

  1. PT Bank Central Asia Tbk. (Rp799 trillion)
  2. PT Bank Rakyat Indonesia (Persero) Tbk. (Rp479 trillion)
  3. PT Telkom Indonesia (Persero) Tbk. (Rp336 trillion)
  4. PT Bank Mandiri (Persero) Tbk. (Rp281 trillion)
  5. Astra International Tbk. (Rp211 trillion)
  6. PT Bank Jago Tbk. (Rp208 trillion)
  7. Unilever Indonesia Tbk. (Rp154 trillion)
  8. PT Chandra Asri Petrochemical Tbk. (Rp139 trillion)
  9. Elang Mahkota Teknologi Tbk. (Rp132 trillion)
  10. PT DCI Indonesia Tbk. (Rp120 trillion)

Investment Strategies based on Market Cap Scale

The investment strategy is a series of ways that investors do to achieve maximum profits and reduce risk. You can’t invest in a real investment.

If you or your company wants to make an effective investment, here are the investment strategies based on the scale of the market cap, among others:

Large-cap

Companies that fall into this market cap category are certainly more stable for a large-cap or blue chip-scale, and you no longer need to doubt. Changes in economic conditions in their home countries do not impact their market capitalization, so the risk is minimal.

The type of investment you make on a large-cap has stable and conservative returns, making it suitable for the long term, and includes ‘safe’ investments.

Middle-cap

For those of you who want to take high risks with high potential, a middle cap scale is where you can show expertise.

The risk in making investments in mid-cap companies tends to be greater. Even so, the opportunity to grow is also classified as greater than other well-known companies that have a larger market cap.

Middle-cap is a company that has a medium market cap value. Companies that fall into this category usually have a fairly rapid development and still have the opportunity to grow bigger. But, there is also the potential for major failures that make you choose the right company carefully.

Small-cap

Companies that fall into this category are new companies that have a higher level of development potential. Even so, while the company is still small-cap, their stock price is easier to go up and down and does not have liquidity as well as large companies that are more stable.

So investing in small-cap companies is usually not for the long term. So you should specify a specific time frame for investing in a small market capitalization.

Conclusion

Market capitalization is divided into three categories: small-cap, mid-cap, and large-cap. To reduce the risk of investing in stocks, you should invest in several companies with various market capitalization scales. A famous metaphor by Miguel de Cervantes said, ‘don’t put all your eggs in one basket.’

Also Read: Investment Ideas for Companies During the Coronavirus Crisis

To invest correctly, you must analyze risk benchmarks, financial goals, time frames for investing, and good business financial statements so that you or your company can measure all forms of investment.

Creating a good and comprehensive financial statement takes a lot of time. For that, you can use Accounting Software from HashMicro. Record your company’s investment activities well. Our Accounting System can help you meet complete record-keeping activities and make it easier to manage your investments comprehensively.

Interest in getting savvy tips for improving your business efficiency?

Fadel Rasyidhttps://www.fadelrasyid.site
I see myself as an active and curious person. Constantly open to learning and growing with values. I never can't see the bright side of a situation — a content writer at HashMicro & a digital marketing enthusiast.

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