Investing, be it for the veterans or the new ones or could also be just a stock market broker, involves many important concepts that must be understood clearly and mastered to make better investment decisions. One such concept is known as Market Capitalization. This is important because companies get classified based on their market capitalization as small-cap, mid-cap, and large-cap.
What is Market Capitalization?
Market Capitalization or more commonly known as Market Cap. It is a quantified market value of the total shares that shareholders of a company hold.
Let’s take an example:
Let’s say a company, ABC, has about 10,000 outstanding shares in the market at Rs 50 per share. The market capitalization will be calculated as
Market capitalization = Outstanding shares x Price per share
= 10,000 X 50
= 5,00,000
Thus the market Capitalization for the company is Rs 5,00,000
Types of Market Capitalization
Securities and Exchange Board of India (SEBI) earlier in 2017 formed a few regulations to categorize companies based on their market capitalization. The three Market Capitalizations are as follows.
1> Small Cap
Companies with a Market Capitalization of less than Rs 5,000 Crore are categorized as small-cap companies. These companies start from a ranking of 251 on the exchange. These are relatively new companies with no long track record, usually start-ups or early-stage businesses.
Features of Small Cap Stocks:
These stocks are heavily influenced by Market fluctuations, making them highly volatile in nature.
The dependency of stocks of small-cap companies on the market makes them more susceptible to market fluctuations, thereby increasing their volatility, making these small-cap stocks quite risky to invest in.
Small Cap stocks are considered amongst the top yielding securities; they potentially can emerge as Multibaggars delivering about 100% returns.
2> Mid-Cap
Companies with a market capitalization between Rs 5,000 Crore and Rs 20,000 Crore are known as Mid Cap companies. These companies are somewhere ranked between 100 to 250 on the stock exchanges. These companies carry a strong potential to become Large-Cap companies in the long run.
Features of Mid Cap Stocks:
Since Mid Caps borders both large and small caps, so they have varied profits and risks; some mid-cap firms with a more developed stage offer more stability than returns, but recently established mid-caps have greater returns than stability.
Mid-caps carry a higher potential for profitability, productivity, and market share.
They can easily have significant gains during a bull market and favorable market conditions.
They tend to be less volatile than the small-cap stocks; however, as compared to Large-cap stocks, Mid Cap Stocks can be highly volatile.
3> Large-Cap
Large-Cap companies have a higher market capitalization than Rs 20,000 Crore. These are ranked as the top 100 companies on a stock exchange. These companies have been in the market for quite a long and are actively traded.
Features of Large Cap Stocks:
Large Cap Stocks are shares of large-cap companies that are quite established and are more resilient to market fluctuations, which makes them moderately reactive to market volatility.
Being resilient to market movement and their moderate reaction to it, they are considerably less risky than small-cap or mid-cap stocks.
The large-cap stocks give moderate and stable returns. Since the companies are large and established, their dividend contributes a large part of the returns.
When the markets go through a slump, these large-cap stocks underperform, but since these are financially strong companies, this underperformance averages out over time
Difference between small-cap, mid-cap and large-cap
|
Aspects |
Small-Cap | Mid-Cap |
Large-Cap |
|
Market Capitalization |
Less than Rs 5000 Cr |
Rs 5,000 to Rs 20,000Cr | More than Rs 20,000Cr |
|
Liquidity |
Low liquidity when compared to mid-cap and large Cap |
Moderate liquidity as compared to mid-cap and large-cap, as the demand is moderate |
High liquidity as the demand is really high |
|
Risks |
Since the companies are relatively new, the risk factor stays high |
The risk is a tad bit less than small-cap but still higher than large-cap |
The risk is quite low sincere the companies are well established |
|
Volatility |
Highly Volatile |
Moderately Volatile |
Less Volatile |
|
Who should ideally invest |
Investors with high-risk tolerance | Moderate risk tolerance having long-term investment plan |
Conservative investors with long-term investing plan |
Conclusion
Market Capitalization plays a quite important role in investing. Stocks are usually affected by many external factors. When small caps or mid caps perform, large caps may not perform well, or the other way round. To have positive returns in your portfolio, it is ideal to diversify your portfolio across the market caps.
Before making any decision, you would need to keep in mind your investment goals, your risk appetite, and the investment horizon and if possible do ask your Stock Market Broker to assist you with your decision-making.