If you are a beginner who is just venturing into the securities market, you may have come across jargon like large-cap stock, blue-chip stock, small-cap stocks, blue-chip stock, etc while looking for investment choices in stock, mutual funds, or any other segment. Market cap or market capitalization is one of the broader categories to classify companies in the securities market. An understanding of market capitalization may help you make an informed investment choice weighing the growth potential and risk appetite.
If you have no clue about what market capitalization is you are at the right place. Read along to know about market capitalization and its types.
What is market capitalization?
Market capitalization, often termed as market-cap is the market value of the outstanding shares of a company. To put it in simple words, it is the market value of all the shares that are held by a company’s shareholders.
Let us look at an example to understand better.
Market Cap= Total number of outstanding shares × Market Price of each share
Let ‘ABC’ is a listed company with 50,000 shares, each trading at a market price of ₹ 900.
The market cap of ‘ABC’ is 50,000 × ₹ 900=₹ 4,50,00,000
Types of Market Capitalization
The three types of companies based on market capitalization are,
Differences between large-cap, mid-cap, and small-cap
| Parameters | Large-cap | Mid-cap | Small-cap |
| SEBI Definition (Listed companies in terms of full market capitalization) | Top 100 companies in stock market | Companies ranked 101-250 | Companies with ranking 251 onwards |
| Market Cap | ₹ 20000 crore
|
₹ 5000- ₹20000 crores | < ₹ 5000 crore |
| Risk Profile | Low | Moderate | High |
| Volatility | Less volatile | Moderate | Highly volatile |
| Liquidity | High | Moderate | Low |
| Growth Potential and returns | Steady and Stable returns | Moderate growth and returns | Considered to be high growth with good returns |
Note:
- Blue-chip companies: Large-cap companies with a market cap >₹ 20,000 crores are also called blue-chip companies. The term “blue chip” comes from the game of poker, where blue chips are the highest value pieces.
- Free-float Market-cap: The market value of the outstanding shares that are meant for trading by the public is called free-float market capitalization. Locked-in stocks are excluded in calculating the free-float market cap.
Conclusion:
Market cap has evolved to be one of the most widely used methods to evaluate a company around the world. It is also a reliable method to weigh the shares of different companies that go into an index in the share market.
While creating a diversified portfolio, the market cap has remained the convenient method to determine the risk profile and growth potential of a company helping investors make an informed choice. But, as an investor, you should also be aware that the market cap does not cover financial debt and other liabilities of the company for that you can refer to Enterprise value. As an investor, make sure you understand the value of a company in terms of market cap as well as other factors before making an investment decision.
