Course 302: Market Capitalization
Market Cap Reflects the Market's Opinion
In this course
1 Introduction
2 Market Cap Reflects the Market's Opinion
3 Market Cap among Sectors

Amazon is a great example of this process. As the company's stock soared more than 1,000% in 1998, Amazon's market cap zoomed past those of Barnes & Noble and Borders BGP, though it does only a fraction of their business. But its sales have been growing at an incredible clip, and many people see Internet commerce as the wave of the future. Amazon's market cap reflects this optimism about the company's future. On the other end of the spectrum, bad news can cause a company's market cap to sink. When network supplier Ciena CIEN revealed in early 1998 that it wouldn't get a major contract from AT&T T, its stock price (and thus its market cap) plunged 45% in a single day. Ciena's present size in terms of sales hadn't changed, but the future of its earnings was suddenly a lot less certain. Even without explicit bad news, general pessimism can knock down market caps considerably. In the bear market of 1973 to 1974, more than 40% of the Dow Jones Industrial Average's market cap simply melted away, even though most companies' fundamentals didn't change much.

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