What is Market Capitalization, and Why Does it Matter?

Market Capitalisation, shortly termed as market cap, is the combined valuation of the company based on its current share price and the total number of outstanding stocks. Further, it is calculated by multiplying the current market price of the company’s share with the entire outstanding (existing) shares of the company.

Market Cap is one of the essential stock market features that help the investor or trader decide the returns and risk involved in the share. Additionally, they can even choose the stocks that meet their risk and diversity criteria. For example, suppose a company has 10 million outstanding shares for each priced at a rate of INR 200, then the market cap of this company will be 1,00,00,000 x 200 = INR 200 crore. Depending on the market capitalisation, companies are further categorised into three types. Let’s stick to the article for getting the entire overview of this topic.

Types of the Market Cap

Based on the technique of evaluating a company, there are a total of three types of company sizes. Take a thorough look at these categories that will ultimately help you choose your stocks for either trading or investing. Moreover, you can even reduce the risk after getting a good glance. Companies with a market cap of above INR 20,000 crore are termed as Large or Mega-Cap stocks. The types are discussed below.

Large Cap – Large-cap companies are considered the most stable group of companies in the stock market. Generally, organisations with an MC (Market Capitalisation) of 20,000 crores or more come under this category. These types of companies monopolise the stock market and are very stable. Even in times of recession or during any other adverse event, these hold still most times. The large-cap companies typically have been functioning for decades and have earned excellent reputations. As a result, investing in these companies is the least risky option.

The stocks are less volatile compared to the mid-cap and small-cap stocks. The lower volatility makes them less sensitive. At the same time, due to a strong foothold and consistency in the market, long term investors prefer the stocks of these companies. Some of the best large-cap market companies are Reliance Industries Ltd., Tata Consultancy Services Ltd., Infosys Ltd., etc. that are listed in the stock exchanges. Anyway, you should also remember that due to the stability of these companies in the market, the return you will get is comparatively lower than the other two categories.

Mid Cap – Companies that have a particular level of growth and are somewhat stable but also have enormous potential for development are considered the mid-cap companies based on their market capitalisation. If I become more specific, then these companies hold a market cap of more than INR 5000 crores but less than 20,000 crores. The stocks of these companies demonstrate that these have reached a certain extent and have further future growth.

Investing in these companies can still be riskier than investing in large-cap market companies. It is because the mid-cap organisations are more volatile than the large-caps. Simultaneously, these companies also have the capability to turn themselves into large caps in the long run. All in all, as the investors get higher growth potential in the stocks of these companies, they are getting attracted to invest. Some of the listed mid-cap companies in the Indian stock exchanges are Crompton Greaves Consumer Electricals, Relaxo Footwears, etc.

Small Cap – Small-cap companies are those that have a market capitalisation of less than INR 5000 crores. These companies are comparatively smaller in size but have immense growth potential. Besides, the companies have the least market cap and are considered the riskiest of all stocks.

The low probability of these being successful makes them successful over time. As a result, the stocks of such companies are volatile in nature. Further, the small-cap companies have a long history of underperformance, but at the time of a recession, the stocks could outperform and provide better results. NESCO Ltd, Thyrocare Technologies Ltd, Delta Corp Ltd, etc., are some of the small cap companies listed on the Indian stock exchanges.

Risk and Reward potential in Every Market Capitalization

The comparatively limited resources of small-cap companies may make their stocks more sensitive to a business or economic downturn. Simultaneously, these could be powerless to the severe competition and irregularities of the stock market. These stocks offer the long-term investors considerable growth potential if they can bear the volatile price swings in the short term.

Midcap companies are in the process of enhancing their market share and improving their overall competitiveness. This growth stage is likely to decide whether a company eventually lives up to its full potential or not. On the other hand, the mid-cap falls between the large and small caps based on the risk/return ratio. All in all, the growth potential is higher in the midcap companies compared to the large caps.

In general, market capitalisation compares the companies’ stage in their business development. Usually, investments in large-cap stocks are believed to be more conservative compared to the stocks of mid and small-cap companies. At the same time, the large-cap companies provide less risk in exchange for less aggressive growth potential.

Bottom Line

Market capitalisation can play an important role in your investment portfolio. Nevertheless, as the market share passes through different phases, the performances of the large, mid, and small capitalisation stocks keep changing. Furthermore, there are specific criteria at the time of stock price change. When the large caps are not performing well, there is a considerable probability that mid and small caps could be on the rise. At the same time, if the small and mid-cap companies are dropping in stock prices, the large caps in your portfolio could provide you with steady returns. So, the stock and mutual fund investors must expand their portfolios by investing in all market caps, depending on thorough research. As a result, your portfolio will tide you over changing market conditions.

According to the novel “Don Quixote”, “It is the part of a wise man to keep himself today for tomorrow, and not venture all his eggs in one basket.” So always try to invest or even trade with diverse portfolios. Last but not least, even if you use diversification, it can either eliminate the risk or the risk of the potential loss or even can’t. Generally, all of it depends on your research skills, the right timing, and various other things.

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