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The market capitalization (market cap) of a company is calculated by multiplying its stock price by the amount of shares outstanding, this number gives you the total dollar value of all the shares in the company at that moment in time. For reference, a large cap company like Microsoft has a market cap of about $300B, Dell has a market cap of about $70B. The true definition of a small cap stock will vary from broker to broker. Some firms consider any company under $2B in market cap as a small cap stock, others will apply the term to companies under $1B. Micro caps will generally have market caps under $500M and are considered to be highly speculative stocks. This is due to liquidity issues, since a small company has fewer shareholders, it is less 'liquid', meaning it will not trade as many shares per day as a larger company. Any sudden change in demand or supply of stock will lead to a lot of volatility in the stock price. This volatility due to liquidity is both a positive and a negative, a small cap stock like Taser (TASR:NASDAQ) rallied from $0.30 to over $30 due to liquidity factors, high demand and low supply of stock sent the price higher. Nano caps is a term not often used, but generally refers to stocks with market capitalizations under $50M. Traders and investors will simply refer to these smaller companies as small caps or penny stocks. Many new investors are lured to the appeal of penny stocks due to the low price and potential for rapid gains which in some cases may be as high as +1000% in a few days. Similarly, severe drops also occur and many penny stocks can drop over 99% in the long term. Penny stocks are considered high risk investments and new investors should be aware of the risks involved. |
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