Assessing the State of One’s Professional Industry

To understand how a company is doing in a particular market, it is important to constantly monitor and check the performance and capitalization values of all public companies present there as their value directly affects the value of non-public entities.

Determining how much a company is worth is an important task and is often a difficult goal to achieve quickly and accurately. Market capitalization is a relatively quick and easy method of estimating a company’s value by extrapolating what the market thinks it is worth to publicly traded companies. In this case, simply multiply the share price by the number of shares available.

Once a company becomes publicly traded and begins operating on the exchange, its price is determined by the supply and demand for its stocks on the market. If there is high demand for its stocks due to favorable factors, the price will rise. On the other hand, if the future growth potential looks grim, stock sellers may reduce their asking price. The market capitalization then becomes a real-time company evaluation mechanism.

Taking all non-public and public companies, one can see that their capitalizations correlate with each other, i.e. if all public companies go up, so do all non-public companies. Public companies’ value is an important basis for valuations and transactions with non-public companies that are characterized by higher volatility.

Practice shows that sharp fluctuations are more characteristic of fast-growing innovative companies and industries. Everyone hears about them, investors have higher expectations of their performance and thus react emotionally to their every success or failure.

Tech start-ups that can offer the world a breakthrough device or software application are among the most volatile.

Once the success of such companies is confirmed, their value can multiply a dozens times over. Therefore, investors are often afraid of missing the opportunity and greedily buy their shares. If such a company fails however, stockbrokers will get rid of its shares in a blink of an eye. That is why there are such sharp ups and downs.

What affects stock volatility?

Most often, volatility increases whenever the market experiences a significant new event that defies most investors’ expectations or at the very least the expectations of the most prominent of them.

People have made decisions and invested under the same conditions… Fresh news comes in, and it turns out that they were all very wrong. What happens as a result? Panic sets in. Someone will actively dump their stocks, while others will actively buy them. Large influxes of trades in opposite directions will send the stock price into a tailspin. This is what volatility is all about.

Anticipated Events and “Black Swans”

There are some news that can be tracked in advance with the help of special calendars, corporate and government websites, or statistical services:

• Financial statement publications;
• Scheduled product presentations;
• Important macroeconomic statistical releases;
• Scheduled financial regulator press conferences;
• Major political speeches;
• Central banks’ decisions on basic interest rates and monetary policies.

In parallel there are also unpredictable events, so-called “black swans,” a name given to them by the famous writer, former trader, and risk manager — Nassim Taleb.

Who can benefit from volatility?

It is important to note that profitability potential grows in proportion to risk. For active traders and speculators, high volatility is more of a pro than a con, because they can make money on most price fluctuations, the larger the change — the better. As stocks go up, traders open long-term positions, and vice versa.

For long-term investors who buy securities for several years, short-term volatility is not a problem at all and can simply be ignored. They might even buy stocks when their price fall illogically low. Unless, of course, the fundamentals of the company’s business have changed completely.

Perhaps the most vulnerable link remains in the form of medium-term investors, who expect profits in the span of a few months or a year. In their case, one needs to be able to recognize the factors that could agitate the market, which requires more in-depth risk management.

What does high market capitalization tell you?

A high level of market capitalization means that a company has a greater presence in the market. Larger companies may display lessened growth potential compared to start-up firms, but larger companies can get cheaper financing, have a more stable revenue stream, and benefit from brand recognition. While this applies to every company, legal entities with higher market capitalization tend to be less risky than those with lower market capitalization.

Market capitalization allows you to compare the value of companies and quickly assess a firm’s financial position without going into its financial statements. A distinction can then be easily made between low-, mid-, and large-cap companies.