Apple and Market Capitalization

Apple and Market Capitalization.

Apple and Market Capitalization

Apple is one of the most admired technology companies in the United States and the world at large. It is a multinational corporation which produces computers and its accessories apart from software developments. Apple is listed on NASDAQ stock exchange for interested investors who wish to purchase the company’s shares. It produces IPhone, Mac books, IPad among other hardware products into the competitive market. Apple has continued to enjoy brand loyalty compared to Samsung over the past couple of years with Apple registering an annual revenues of $233 billion in 2004 with a market value of approximately $118 billion. Given the statistics, Apple has continued to tighten its nuts to ensure stock price stability on the foreign exchange rates over the financial period. Investors therefore rely on the company trading against its competitors to obtain the best deal in terms of future returns. It is for this reason that investors are in need of the information about market capitalization (cap). Market cap of a company is the total value of its stock in the market over a given point in time. Investors will be interested to obtain the value of market cap as it determines the size of a corporation and the risk return trade-off for that matter. This paper will expound on market capitalization and future currency as a method of hedging risks for investor decision making.

Companies with a large market cap are preferred to those with lower market cap since the latter has a substantial revenue, promises dividends and huge amount of resources in terms of assets. Conversely, a large market cap may not necessarily mean that one company is better that the other. Instead, it indicates the company size in terms of capital base.  In this scenario, Apple has a large market cap of $601billion compared to Samsung 208 trillion KRW. The current exchange rates shows that 0.000685 UD is equivalent to 1 KRW which signifies that the dollar is much stronger that the Korean Won. To obtain the market capitalization of Apple in terms of KRW, you will be required to divide $601 by 0.000685 (Bloomberg Markets 1). Furthermore, Apple has gained a market reputation in the international scales compared to Samsung and therefore Apple brand is widely recognized. The price volatility of Apple on the exchange rates are stable given the large market cap. The perspective of most investors is to accept corporations with large market capitalization with low price volatility. It can be concluded with a lot of degree of confidence that Apple Company offer longer term investors of (3-4 years) better value. Nevertheless, it is advisable to engage in risk diversification techniques to spread the chances of losing an investment due to adverse exchange rates. A standard portfolio that is well diversified contain both large capitalization, medium and small cap. In a nutshell, investing in a wide portfolio lowers the risk return trade off while reducing the potential gains in terms of market returns.

In order to shun the risks associated with currency fluctuations and exchange rates, Apple may consider entering into currency futures in order to hedge the risk on loss of revenues. Currency futures are forms of derivatives that derive their value from other underlying assets. In this case, currency future (FX future) is a contact between two parties to transact their currencies at a prices specified at a later date in future.  One country may choose to exchange its currency with another country’s currency basically for foreign exchange rate risk mitigation. Apple may therefore enter into currency futures especially if it wishes to import Samsung products or raw material for its expansion. This is possible if there is an anticipation in future price increase or a change in the foreign exchange rates. Apple is likely to suffer a huge financial loss if the dollar fell against the Korean Won in the stock market. Therefore, Apple Company will enter into currency future with Korea to purchase Korean Won in advance at a guaranteed foreign exchange rate. Consequently, if the above transaction occurs, then Apple would have mitigated currency risks by participating in a currency future contract. Investors can engage in a portfolio risk analysis by reducing the level of financial market risks through financial instruments.

Trading in shares can be very risk especially if an investor lacks knowledge of the financial markets. Using the above scenarios, Apple Company is highly preferred by investors compared to Samsung based on the market capitalization analysis. The decision rule is to accept investments with large market cap and ignore investments with small market caps. However, this may not be the case at all times since market cap only measures the size of the firm and value in terms of revenues. Nonetheless, the basis of valuation and market risk mitigation is achieved by utilizing financial derivatives. Moreover, Apple stock prices are stable and less volatile making it to maintain low risk level to attract investments in its shares compared to Samsung Company.

 

 

Works cited

Bloomberg Markets. Apple Inc. 2016. Web. April 6, 2016. http://www.bloomberg.com/quote/AAPL:US

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Apple and Market Capitalization

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