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Fundamental analysis of stocks requires you to assess the company size, the size of its market, the growth opportunities, financial stability, the brand value and the network of the company. The decision to invest in a stock is a result of a well-rounded examination of all these details, alongside timing the market.
In the following sections, we will check how the market capitalisation of a company is related to its other features.
Key Takeaways
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Market capitalisation shows a company’s total value, calculated as share price × number of shares.
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Large cap stocks (₹20,000 crores or more) offer stability, steady growth, and regular dividends.
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Mid cap stocks (₹5,000–₹20,000 crores) balance growth potential with moderate risk.
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Small cap stocks (below ₹5,000 crores) provide high growth opportunities but come with higher volatility.
What Is Market Capitalisation?
In the world of investing, stocks are often categorised based on their market capitalisation. Simply put, it is the total value of a company's outstanding shares. It is the value of the ownership of the entire company. It serves as an essential indicator of a company's size and overall worth in the market. Its formula is,
Market capitalisation = Current share price * Number of shares outstanding.
Based on market capitalisation, stocks are broadly classified into three categories: large cap, mid cap, and small cap stocks. Let us explore each category in detail and understand their characteristics.
What Are Large Cap Stocks?
Large cap stocks refer to companies that have a significantly high market capitalisation. To be specific, their total market cap has to be ₹20,000 crores or more.
These companies are often well-established brands that are financially stable. These businesses have a proven track record of stability and success, including during times of economic downturn. This means they have a proven business model that gives them a regular cash flow, out of which they can pay out dividends.
Large cap companies can sometimes take up risky projects, though they are better placed to withstand those risks due to their brand’s network and financial strength. Moreover, these companies can face stiff competition from other large cap companies and mid cap companies looking to take away market share.
Investors often consider large cap stocks relatively less risky than mid cap and small cap stocks. Due to their stable nature, large cap stocks are popular among conservative investors and those seeking steady income through dividends.
What Are Mid Cap Stocks?
Mid cap stocks fall in the middle of the market capitalisation spectrum - their value ranges between ₹5,000 crores and ₹20,000 crores. They represent companies that are larger than small cap companies but smaller than large cap companies.
Mid cap stocks are known for their potential for growth and expansion. These companies are in a phase where they have already established their presence in the market with a proven business model. But they still have room for further scaling and expansion.
However, they also face tough competition from both large cap, small cap and other mid cap companies. For instance, large cap companies can pressurise them by cutting prices or by employing greater economies of scale. Simultaneously, small cap companies can focus on their niche markets and slowly take away revenue from the mid cap company.
Investors who are willing to take moderate risks and seek a balance between stability and growth often find mid cap stocks appealing.
What Are Small Cap Stocks?
Small cap companies are those with a market capitalisation of less than ₹5,000 crores. They are typically newer and less-established companies that are still in the early stages of growth and development. Small cap (as well as many mid cap companies) are often associated with emerging or ancillary industries and niche market segments.
These companies have the potential for significant growth, but they also come with higher risks. The latter is due to the challenges that they may face such as stiff competition from bigger companies, volatile revenues, underdeveloped brand value, uncertainty in the availability of credit from risk-averse financial institutions etc.
Therefore, small cap stocks are generally more volatile than large cap and mid cap stocks. Investors comfortable with higher risks and seeking substantial growth opportunities often invest in small cap stocks.
Difference Between Small Cap, Mid Cap, and Large Cap Companies
| Issue | Large cap | Mid cap | Small cap |
| Market Capitalisation Range | ₹20,000 crores or above. | ₹5,000 crores to ₹20,000 crores. | Less than ₹5,000 crores. |
| Stability vs. Growth | Higher stability but lower room for growth in the stock price. | Higher potential for growth compared to large cap stocks but are relatively less stable. | High growth potential but also higher volatility and risk. |
| Market Presence and Recognition | Have global presence and are often part of major stock market indices. | Achieved recognition but may not have the same level of global or national visibility as large cap stocks. | May not have widespread recognition. |
| Liquidity i.e. greater number of shares available for trading | Large cap stocks have the highest liquidity - which leads to lower risk. | Mid cap stocks have lower liquidity compared to large cap stocks. | Small cap stocks tend to have the lowest liquidity due to their lower trading volumes. |
Which One is the Best for Investment?
Large cap, mid cap and small cap stocks all have their respective advantages and disadvantages, as written in great detail above. Therefore, you have to decide which is best for you, based on your risk tolerance, investment objectives, and time horizon.
The best way here is to buy your preferred proportion of stocks from each category of market capitalisation to balance the risk and reward in your investment portfolio. The large cap stocks can give you stable and decent growth, especially if it comes with dividends. On the other hand, small cap stocks can give you growth potential, and bring up the overall growth rate of your portfolio.
How To Diversify Your Portfolio with Large Cap, Mid Cap, And Small Cap Stocks?
A diversified mix of large, mid, and small cap stocks can balance out risk and reward within your portfolio. Now that we understand how these shares differ from one another, it is best to use this knowledge in creating a diversified portfolio. The trick is to have the proper combination of each group depending on your risk appetite, investment horizon, and financial objectives.
The following are some general guidelines.
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Low-risk or conservative investors: Invest in a large cap dominated portfolio of 70-80% large-cap stocks, 20-30% mid-caps, and little or no small cap exposure. This ensures stability and steady income.
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Investors with a medium risk appetite: Invest in a well-balanced portfolio of 50-60% large-caps, 30-40% mid-caps, and 10-20% small-caps. This gives the best of both worlds - stability and growth.
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High-risk appetite investors: Opt for a more growth-oriented fund with 30-40% large caps, 40-50% mid-caps, and 20-30% small caps. Expect higher return volatility.
The relative mix will depend on your individual circumstances and objectives. It's advisable to take the advice of a financial planner to design a tailored asset allocation plan.
Also, diversification doesn't stop at a market cap. It is also necessary to diversify among sectors, geographies, and asset classes. Don't keep all your eggs in one basket, as they say.
Popular Indices to Track Small Mid and Large Cap Stocks
One way to track how a stock is performing is by comparing it against popular indices. Here are the benchmark indices to follow for these stocks:
Small Cap Indices
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Nifty Smallcap 100 (NSE): This index tracks the top 100 small-cap companies listed on the NSE. Typically, these are stocks ranked from 251 to 350 based on their full market capitalisation, chosen from the broader Nifty Smallcap 250 index.
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BSE Smallcap (BSE): This is a broader, market-weighted index that tracks the performance of the entire small-cap segment on the BSE (i.e., all stocks outside of the BSE LargeCap and MidCap indices). The number of constituent companies here is not fixed at 100.
Mid Cap Indicies
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Nifty Midcap 100 (NSE): This index specifically tracks the performance of the top 100 mid-cap companies listed on the NSE. These companies are usually ranked from 101 to 200 by full market capitalisation.
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BSE Midcap (BSE): Similar to its small-cap counterpart, this is a broad index that represents the entire mid-cap segment of the BSE. It includes stocks larger than small caps but smaller than large caps, and the number of stocks it tracks is variable.
Large Cap Indices
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Nifty 50 (NSE): This is the flagship index of the National Stock Exchange. It tracks the 50 largest and most liquid companies in India. It's the primary benchmark for the Indian stock market.
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BSE Sensex (BSE): This is the flagship index of the Bombay Stock Exchange. It tracks the performance of 30 well-established and financially robust companies on the BSE.
Market Capitalisation and Mutual Funds
Mutual funds often design their investments as per market capitalisation. For example, a mutual fund house may create a fund that invests only in large cap companies. Such a fund usually contains the word large cap in its name itself. Therefore, we can have large cap funds, mid cap funds and small cap funds offered by different fund houses in India.
Final Words
In conclusion, large cap, mid cap, and small cap stocks differ in their market capitalisation, growth potential, risk, and liquidity. Large cap stocks are known for stability and lower risk, while mid and small cap stocks offer higher growth but with added volatility. Understanding these differences helps you choose investments that match their financial goals and risk appetite.