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In a recent investor alert, FINRA offers novice investors an explainer regarding market cap. You may hear companies described as large-cap, mid-cap or small-cap. Certain stock indexes or investment funds will use this measure to group companies together by size. For example, the S&P 500 is made up of large-cap stocks and is weighed by market cap, so companies with a higher market cap account for relatively more of the index than companies with a comparatively smaller market cap. Meanwhile, the Russell 2000 Index is a small-cap stock market index. Newer investors might mistakenly believe that stock price alone could be a good indicator of how large a company is, but what is most important in determining a company's size is the number of shares outstanding. But here's something important to keep in mind: because stock price is determined by investors, market cap is the perceived value of a company. It isn't necessarily the actual value of a company and all of its parts. Some of that perceived value may stem from expectations of future growth or the introduction of a product, but those expectations may not pan out, in which case the share price of the company—and thus it's market cap—is likely to adjust accordingly … HIGHLIGHTED EVENT:Want to learn more about investing? Attend an AAII Local Chapter Meeting near you

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Formed in 1989, the ICI Education Foundation (ICIEF) is the educational affiliate of the Investment Company Institute, the national association of US investment companies. ICIEF partners with government agencies and other nonprofit organizations to develop, deliver, and promote investment education programs to a variety of specific audiences. The Foundation also participates in financial education advocacy coalitions, conferences, and initiatives that promote saving and investing nationwide. To contact ICIEF, go here.


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