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Every day many companies cross from one category into another as their stock prices rise and fall. It becomes difficult to reclassify a company every time its market cap moves from one category into another. So many times the average market cap over a period of time (such as a month or a quarter) is used to determine a company's classification. Again, this form of classification is arbitrary. It is used loosely to group companies together based on their market values.

A company's valuation is also a good way to determine whether its stock is over or under priced. It may be okay for Ford to have a market cap of $60 billion, but should a small company with a hot stock have the same valuation? You may answer no, but the market may not agree with you. In the late 90s, with the explosion of the Internet companies, the valuations had gone sky high in very short times. This had baffled many analysts, but investors seemed to care little as they continued to buy shares in the Internet companies with already inflated valuations. By the middle of year 2000 many investors had come to their senses and brought the valuations back to earth. An example? Yahoo (an Internet search engine) had a higher market cap than Ford.Was this justified for a six-year-old company with little earnings? Investors seemed to think so, as they bet their investment dollars on the hope that some day Yahoo would become very successful and profitable. Some believed that the rules of the market had changed and valuations and P/E ratios (covered later) were less important than they used to be. Others called this kind of a runaway valuation a bubble that sooner or later would burst when investors came to their senses. Again, as some had anticipated, years …