Market Cap in the eyes of investors: Why is it important for investment decisions?

What is Market Cap and How Should We Calculate It?

Market Capitalization or Market Cap( is considered one of the most important indicators for assessing a company’s size and potential. Its calculation method is quite straightforward: Market Cap = Price of the coin × Circulating Supply

For example, when Bitcoin is priced at $30,448.54 and has a circulating supply of approximately 19,413,893 BTC, the Market Cap of Bitcoin would be about )billion US dollars. This figure reflects the total market value assigned to Bitcoin at that moment.

To better understand, consider two companies: Company A has 1,000,000 shares outstanding priced at 100 baht each, while Company B has 100,000 shares but at a price of 200 baht. When calculating market value, Company A would be valued at 100 million baht, whereas Company B would be only 20 million baht. Therefore, even though the share price of Company B is higher, the market value of Company A remains larger.

What Does Market Cap Indicate About a Company?

The size of Market Cap does not only reflect a number; it also relates to the company’s business structure and growth potential:

1. Indicator of Size and Influence. Companies with high Market Cap are often industry leaders, with abundant resources, extensive business networks, and strong brand recognition. Conversely, smaller companies may be more agile but face higher risks.

2. Access to Funding. A large Market Cap makes it easier for companies to access capital, whether through loans or issuing securities. Lenders and investors tend to view large companies as more reliable debt payers.

3. Opportunities for Talent Acquisition and Mergers & Acquisitions. High Market Cap companies usually have sufficient funds and market confidence to pursue M&A or expand their business. This opens opportunities for growth through partnerships and entering new markets.

Classifying Companies by Market Cap Size

Investors often categorize companies into three types based on Market Cap:

$591 Large Cap Companies ###Market Cap > 50,000 million baht( These are market leaders with stable operations, consistent profits, but may face growth challenges due to their size. Low-risk investors often prefer this category.

) Mid Cap Companies ###Market Cap: 10,000 - 50,000 million baht( Mid-sized with decent growth potential but face increased competition risks. Stock price volatility tends to be higher.

) Small Cap Companies ###Market Cap < 10,000 million baht( Small-sized firms, possibly in development or startup phase, with high growth potential but also high risk. Stock prices are highly volatile, and they may lack sufficient resources.

The Relationship Between Market Cap and Stock Price

Market Cap and stock price are interconnected but not the same:

Stock price is simply the value of one share at a given moment, while Market Cap represents the total value of the company as perceived by the market. When Market Cap increases, it indicates that the market views the company’s value as higher, often leading to higher stock prices.

In stock index construction, Market Cap plays a crucial role. Companies with higher Market Cap are given more weight in the index, helping it more accurately reflect overall market trends.

How Should Investors Use Market Cap?

Risk Management. By diversifying investments across companies with different Market Caps, investors can build a balanced portfolio with stability )from Large Cap( and growth potential )from Small Cap(.

Asset Allocation. Conservative investors might allocate 70% to Large Cap and 30% to Mid-Small Cap, while more risk-tolerant investors may adjust these proportions for higher risk exposure.

However, investors should not rely solely on Market Cap because:

• Market Volatility. Short-term fluctuations can cause Market Cap to change dramatically without reflecting the company’s true strength.
• Valuation Factors. Market Cap depends on market expectations and sentiment, which can sometimes deviate from intrinsic value.

Therefore, wise investors should:

• Analyze financial statements and profitability.
• Compare Market Cap with other companies in the same industry.
• Look ahead and avoid focusing only on short-term Market Cap changes.

Summary

Market Cap is a powerful tool for understanding a company’s size, stability, and potential. By understanding how Market Cap is calculated, what it signifies, and how to utilize it, investors can make more informed investment decisions. Nonetheless, Market Cap is just one indicator; smart investing requires deeper and more comprehensive analysis.