Market Capitalization

Many novice traders attempt to compare the stock price of one company to the price of another company.  The logic (which is wrong) is that they can compare the value of the stocks in this way.  This is wrong because you are comparing apples to oranges.  To compare apples to apples, though, you need to examine a company’s market capitalization.  Market capitalization helps explain the difference in price between two similar stocks.  A company’s market capitalization is its current stock price multiplied by its number of shares outstanding (float).  In other words, a company’s “market cap” is the value of all shares of stock taken together.  Is a $5 stock cheap?  Is a $300 stock expensive?  The price per share, taken alone, means nothing.

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