Before you devise a strategy to allocate funds in equity investments, you need to factor in your expectations of returns, your financial goals and your ability to take risks.
Market capitalisation is also referred to as market cap. Based on the market cap, there are three tiers of stocks for investors to choose from – large-cap stocks, mid-cap stocks and small stocks.
Let us look at the basis of market capitalisation and the characteristics of these three classes of stocks.
What is market capitalisation?
Market capitalisation is the aggregate value of the company determined by multiplying the company’s share price with the total number of outstanding shares. Outstanding shares, also known as issued shares, are the company’s common shares. They are owned by the stockholders, company officials, retail investors (non-professional, individual investors) and institutional investors (organisations that invest on behalf of its members).
For example, let us assume that a company has four crore outstanding shares and the current market price of Rs 30 per share. Then, the company’s market capitalisation is 400000000 X Rs 30 = Rs 120 crore.
The market price of a share reflects the public opinion about the company’s worth. The market capitalisation does not remain constant and changes with the company’s performance, economic and market conditions and government policies.
What are large-cap stocks?
The Association of Mutual Funds of India (AMFI) releases a list of stocks biannually. The ranking is based on market capitalisation.
As per the Securities and Exchange Board of India (SEBI), large-cap stocks are stocks of companies which are the first 100 companies in this list in terms of capitalisation.
These companies that are well-established and have a good performance record. Generally, these companies are the leading names in their respective sectors. They are also known as blue-chip companies, and they are always closely watched by investors and analysts.
Also read: What is large cap mutual funds?
What are mid-cap stocks?
Mid-cap stocks are mid-sized companies and have more opportunities for growth and expansion than large-caps as they are yet to reach a saturation point. They have the potential to become large caps in the future, yet they are also more risk-prone than large caps. The mid-cap range may have a mix of established companies as well as those companies that are relatively new. According to experts, the performance of mid-cap stocks is marked by phases of steep growth, offering high returns to investors. That can be a result of a mid-company being able to manage operational risk for improving its performance. Depending on the growth of its profits, revenues and market share over a while, a mid-cap stock can leap into the lists of large-cap stocks or slip beyond the 250th position and join the list of small caps. Mid-cap stocks are more suitable for investments timeframe spanning 5 to 10 years. New investors with low-risk tolerance should be careful. In the short – term, they are more prone to market volatility. You may have to do a thorough analysis before choosing a mid-cap stock.
Also read: Finding value in mid-cap stocks
What are small-cap stocks?
Generally, these are publicly traded companies with a market capitalisation less than Rs 500 crores. This list has start-ups and companies that are relatively new and have significant potential for growth and are yet to explore avenues of expansion.
When an economy is recovering from a slowdown, these companies tend to perform well. It is because, in such phases, interest rates are lower, making capital cheaper, which can be used for expansion. However, small caps are also the riskiest during periods of market lows and the economic downturn as they may not have the financial back up necessary to withstand bad times. These companies play an essential role in job creation in the economy.
There is little information about small-cap companies, and it may be difficult for you to gather information about them as an investor. They are better suited for investors who have a high-risk tolerance. They have the potential to generate significantly higher returns than large and mid-caps in the short-term. As small-cap stocks are affected by market volatilities, many investors choose to time their investments in these stocks.
Also read: What are small-cap mutual funds?
One related number : Rs 89,535 crore
In August 2019, eight of the ten most valued companies in India lost a combined market valuation of Rs 89,535 crore. At present Tata Consultancy Services holds the top spot with a market capitalisation of Rs 8,30,777 crores.
- Small-Cap Stocks and Their Effect on the Economy Read more to know the importance of small-caps in an economy and the main points of differences with large and small caps.
- Hope is back for Indian markets, but the shadow of uncertainty remains Read more to get a clear picture of the characteristics of mid-cap stocks and how you can benefit from such stocks as an investor.
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