The outline of the article:
Indicator that reflects the total costall shares of the company - this is capitalization. From this figure, one can judge the scale of the business and the value of its products in the stock market in types of securities.
The higher the company's capitalization, the more stableits position in the market, the greater the demand for its products, and therefore for stocks. All experienced traders and investors are primarily interested in this particular indicator. If he begins to fall, then the main question that worries the holders of securities - the reasons for the fall. Everyone wants to understand whether it is worth contacting the shares of a company.
Therefore, it makes sense to figure out why capitalization may fall and how this affects the value of stocks.
What is the essence of capitalization?
This objective market indicator helps to understand how much it costs to buy absolutely all shares of the company at the current price.
The mathematical formula for the calculation is as follows:
For example, the company has issued 100 thousand shares at $ 10 each at the moment. We multiply and get a market capitalization of $ 1 million.
This applies only to ordinary shares. This does not include preferred stocks and bonds. At the same time, you understand that when the value of shares increases or decreases, then capitalization also changes accordingly.
It follows the conclusion that traders and investorsin the first place, companies with higher capitalization will be interested. Although the shares of companies with medium and low indicators also have their advantages - they can be purchased at very reasonable prices and count on growth prospects.
Why can stock prices decline?
They depend on the subjective ideas of financial analysts or investors about the real prices of companies, on the forecasts and prospects for the growth of their capitalization.
For any product, the price is at any timeto change. And this directly affects the course of any business and its success. From the point of view of an enterprise that sells goods, growth is good. But for those who buy - it’s bad.
But even if the company carries out activities thattrade is not connected in any way, it can also affect it. Judge for yourself - when the next rise in price of many goods occurs, the population slides into austerity. People are less likely to use the services of any companies, as the overall purchasing power of citizens decreases. And if it decreases in general, then this affects the whole economy as a whole.
What else can affect the growth or decline of capitalization?
The price of goods or services of a company maydecline after negative publications and reports. The accident at the Fukushima nuclear power plant in 2011 provoked a fall in the shares of the uranium industry and US utilities that consume their energy. Imagine the scale of this bad news alone, which has affected several industries at once. And when there is a lot of such news, the economies of different countries fail, which leads to global crises.
Each company has its own credit rating, thenthere is an economic assessment of experts. The amount of interest that companies pay to raise funds depends on their place in the ranking. Stock prices of companies traded on exchanges affect what rating (rating) analysts will give them. And the level of trust of traders and investors of a company depends on how the quotes fluctuate.
Nowadays it’s hard to find businesses thatmore than a hundred years in the market. The reason is that many companies have too quickly become obsolete production technologies and sales methods. Competition is growing. And there is always a risk that other manufacturers are able to present similar products of improved quality to the market at lower prices.
The legislation of too many countries is soimperfect that you can always find a discrepancy between the aspects of the activities of companies and the norms of the law. Experienced employees of the inspection bodies or auditors will easily find errors in the reporting (well, if unintentional), not paid taxes on time, or even a banal theft of funds by management. Such exposure will cause serious or even irreparable damage to the reputation of the enterprise. Because of this, the value of stocks can also fall, if not worse - depending on the scale of the disaster, the company may cease to exist at all.
Traders and investors have watched more than oncethe picture when authorities apply restrictive measures to individual corporations or entire industries in the form of antitrust laws, new regulations or something else. Therefore, there are companies and even states in which investors are not interested in investing money.
They often go hand in hand with changeinterest rates. If a business needs financing and takes a loan from a bank, which then increases the interest rate, then the entrepreneur has certain difficulties. He has growing business costs, it is increasingly difficult for him to stay afloat.
And when interest rates rise due to rising inflation, it is even more difficult for companies to attract additional financing amid a decrease in the overall purchasing power of money.
Economic forecasts are a rather shaky thing. Since people still build economic expectations, even if they are highly competent, there is still a risk that the assumption may turn out to be inaccurate. Namely, they are taken as the basis for building a business model. Moreover, any inaccuracy can affect not only the company itself, but also its suppliers and contractors.
Any business involves risks. Therefore, there are no companies and stocks that do not experience a fall in prices.
In addition, there are additional factors:
New companies often suffer from this. When they appear on the market, there is a stir because everyone is waiting for some kind of innovation and often the price of stocks becomes unreasonably high. And when the hype falls, the understanding comes that the overpriced is not supported by anything. Accordingly, quotes and capitalization are falling.
Therefore, when choosing a stock, we recommend that you find outas much as possible about this or that company, carefully examine all the information that may affect the capitalization rate and only then make a decision on the purchase of securities.
If you doubt that you can handle this task yourself, you can join us by signing up for a free course, where this issue is considered among others.
And if you are already an experienced investor, share in the comments what criteria you are guided by when choosing stocks of certain companies.