Market Capitalization

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What comprises a small-cap company? The answer will vary widely depending upon who you ask and the universe of stocks that they invest in. For an investor who restricts his investments to S&P 500 companies, a billion dollar company may be a small company. For an investor who looks at smaller stocks on the NASDAQ, the cutoff will be much lower. It will also shift as the market goes up and down. At the peak of the stock market in 1999, there were dozens of companies trading at market capitalizations that exceeded $ 100 billion. In 2002, after three years of a bear market, there were only a handful left.

The best way of assessing the differences that make for small and large companies is to look at the distribution of market capitalizations across the market. Figure 9.7 presents the number of listed firms in the United States that fall into different market capitalization classes at the end of 2002.

Figure 9.7: Market Cap Distribution

Figure 9.7: Market Cap Distribution

Market Cap- End of 2002

Data from Value Line. The number of firms in each market capitalization class is reported.

Note the extraordinary number of firms (more than 1200) that had market capitalizations that were less than $ 5 million. This represents the convergence of two phenomena - the large number of small companies that went public in the 1990s and the dramatic fall in value at these companies as the technology bubble burst. In fact, you can safely argue that a large number of the smallest companies will cease to exist as publicly traded entities in the near future. If you adopt commonly used criteria for small cap ($250 million and less, for instance), you would find more than two thirds of all listed companies being classified as small cap.

If small is difficult to define, lightly followed is even more so. One measure of following is the number of analysts who follow a company. Many of these analysts work for investment banks or for portfolio managers. In Figure 9.8, the distribution of firms, categorized by number of analysts tracking them in early 2003, is provided.

Figure 9.8: Number of analysts estimating earnings per share: U.S. firms in January 2003

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