Difference Between Large Cap Vs Small Cap Vs Mid Cap Stocks

Market capitalisation is one of the most fundamental concepts that investors need to know before choosing the right stocks for investment. Read on to know more about this important stock feature!

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.

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

IssueLarge capMid capSmall cap
Market Capitalisation Range20,000 crores or above.5,000 crores to 20,000 crores.Less than 5,000 crores.
Stability vs. GrowthHigher 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 RecognitionHave 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 tradingLarge 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.

Difference Between Large Cap Vs Small Cap Vs Mid Cap Stocks

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.

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 terms of market capitalisation, stability, growth potential, liquidity, and risk. Large cap stocks are associated with stability and lower risk, while mid cap and small cap stocks offer higher growth potential, but also higher risks. Understanding the characteristics and dynamics of each category is crucial for investors to make informed investment decisions that align with their financial goals.

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What are the advantages of investing in large cap stocks?

Large cap stocks are often considered less risky than mid cap and small cap stocks due to their established market positions and stability. They often have strong balance sheets, established customer bases, and consistent cash flows, allowing them to pay more dividends too.

Are mid cap stocks riskier than large cap stocks?

Yes, mid cap stocks are generally considered riskier than large cap stocks. They face challenges associated with expansion, including stiff competition and maintaining good financial health. They are hence yet to have the same level of investor confidence that large cap stocks enjoy.

Can small cap stocks outperform large cap stocks?

Since small cap stocks are typically in the early stages of growth, successful small cap companies can experience substantial appreciation in their stock prices. Small cap stocks often operate in niche markets or emerging industries, which can provide opportunities for significant expansion. However, they have less resources to give out regular dividends at a growth stage and run a higher risk of failure than large cap stocks.

How can investors assess the risk of investing in mid cap stocks?

Investors should consider factors such as the company’s financial health, growth potential, competitive landscape, and management team. Additionally, understanding the industry dynamics and potential risks specific to the sector can help investors make more informed decisions.

Is it necessary to diversify investments across large cap, mid cap, and small cap stocks?

By diversifying across different market capitalisations, investors can reduce risk and enhance their overall portfolio performance. Large cap stocks provide stability and steady dividends while small cap stocks bring higher risk and potential for significant returns.