By recently looking at the S&P 500 in regards to largest market capitalization, we learned that Berkshire Hathaway has now earned the number three spot and has taken over for Google Inc., according to information presented by The Online Investor.
If you are an investor, it’s really important to keep your eye on market capitalization for a whole host of reasons. But the biggest reason of all is that it truly allows you to compare a company’s stock to the value credited by the stock market.
New investors often make a simple mistake. They’ll see one company’s stock trading at $20, and then another company’s stock trading at $10, and think that the company whose stock trades for $20 is worth twice as much as the other business. That is an incorrect comparison. In order for it to work, you must know how many shares exist for each company.
But when you factor in the share counts and compare market capitalization, this provides a true comparison and gives you the ability to get a real-world value for both stocks.
Berkshire Hathaway’s current market capitalization is now $260.10 billion. Google’s market capitalization is only $255.40 billion. But, the price of Berkshire Hathaway Class A shares cost over $150,000 more per share than Google. That doesn’t mean the company is worth 150,000 times more than Google.
Market capitalization is also important because it shows where a company is placed in terms of its size when comparing it to other businesses in its peer group. An example is comparing a standard pickup truck to another standard pickup truck. It wouldn’t be fair to compare a standard pickup truck to a compact car.
This can also have an immediate impact on which ETFs and mutual funds are willing to purchase the stock.
As an example, some mutual funds specifically only invest in small cap stocks, so that is where they focus. The S&P MidCap index is also another example. In essence, this fund takes the 100 biggest companies on the S&P 500 and it removes them. It only focuses on the up-and-coming smaller 400 companies.
So the market capitalization of a company is very important, and this is especially true in relation to other businesses. That’s why it’s very valuable to rank companies this way on a daily basis.