Trading On Line - Market Capitalization

Market capitalization is defined as the total dollar value of a stock’s outstandingshares and is computed by multiplying the number of outstandingshares by the current market price. Thus, market capitalization is ameasure of corporate size. With approximately 8,500 stocks available totrade on U.S. stock exchanges, many traders judge a company by its size,which can be a determinant in price and risk. In fact, there are four unoffi-cial size classifications for U.S. stocks: blue chips, mid-caps, small caps,and micro-caps.1. Blue-chip stocks. Blue chip is a term derived from poker, where bluechips in a card game hold the most value. Hence, blue-chip stocks arethose stocks that have the most market capitalization in the marketplace(more than $5 billion). Typically they enjoy solid value and goodsecurity, with a record of continuous dividend payments and other desirableinvestment attributes.2. Mid-cap stocks. Mid-caps usually have a bigger growth potential thanblue-chip stocks but they are not as heavily capitalized ($500 millionto $5 billion).3. Small-cap stocks. Small caps can be potentially difficult to trade becausethey do not have the benefit of high liquidity (valued at $150million to $500 million). However, these stocks, although quite risky,are usually relatively inexpensive and big gains are possible.4. Micro-cap stocks. Micro-caps, also known as penny stocks, are stockspriced at less than $2 per share with a market capitalization of lessthan $150 million.Some traders like to trade riskier stocks because they have the potentialfor big price moves; others prefer the longer-term stability of blue-chipstocks. In general, deciding which stocks to trade depends on your timeavailability, stress threshold, and account size.