Market capitalization, sometimes referred to as market cap, is the total value of a publicly traded company’s outstanding common shares owned by stockholders.
Market capitalization is equal to the market price per common share multiplied by the number of common shares outstanding. Since outstanding stock is bought and sold in public markets, capitalization could be used as an indicator of public opinion of a company’s net worth and is a determining factor in some forms of stock valuation.
Calculation
Market cap is given by the formula
Market cap = N*P
Where MC is the market capitalization, N is the number of common shares outstanding, and P is the market price per common share.
Large Cap
Large cap stocks also known as big caps are shares that trade for corporations with a market capitalization of Rs 20,000 crore or more. Large-cap stocks tend to be less volatile during rough markets as investors fly to quality and stability and become more risk-averse.
They hold themselves well in times of recession or during any other negative event. Besides, they will usually have been functioning for decades and have good reputations. If you want to invest in a company’s stocks by taking less risk, then large-cap stocks are a good option. These stocks are less volatile in comparison to mid-cap and small-cap stocks. The lower volatility makes them less risky.
TCS, Reliance Industries, HDFC, ICICI, SBI are examples of some large-cap market companies that are listed on the stock exchanges of India. Their strong foothold in the market and consistent good performance makes them good choices for long-term investors.
According to SEBI’s rules, all companies that are listed on the stock exchanges are ranked based on their market cap. The top 100 companies are categorised as large cap companies. Mutual funds that invest in the stocks of these large cap companies are categorised as large cap funds.
Mid Cap
Mid-cap companies are companies whose market cap is above Rs 5,000 crore but less than Rs 20,000 crore. Investing in these companies can be riskier than investing in large-cap market companies. This is because mid-caps tend to be more volatile. On the other hand, mid-cap companies also have the ability to turn into large-cap companies in the long run. These companies offer a higher growth potential than do large-cap stocks, and hence more investors are attracted to investing in such companies.
Adani Total Gas, HAL, IRCTC, PI Industries are some examples of mid-cap companies that are listed on the stock exchanges of India.
As per SEBI’s classification, the companies from rankings 101 to 250 in terms of market capitalization are known as mid-cap companies. Since mid-cap companies have a moderate to strong market presence, they may or may not be widely included in broad market indices.
Small Cap
Small-cap companies are those that have a market capitalisation of less than Rs 5,000 crore. These companies are relatively smaller in size and have significant growth potential. What makes them risky is the low probability that they will be successful over time. This makes the stocks of such companies volatile in nature. Small-cap companies have a long history of underperformance but when an economy is emerging out of a recession, small-cap stocks often prove to be outperformers.
According to SEBI’s guidelines, that all the companies that are ranked from the 251st position onwards in terms of market cap are automatically categorised as small-cap companies. Small-cap companies generally don’t have a long track record. These companies could either be relatively new start-ups or businesses that are still in the developmental stage.
City Union Bank Ltd., IDFC Ltd., KPIT, CDSL, Apollo Tyres are some examples of mid-cap companies that are listed on the stock exchanges of India.
Difference between large cap, mid cap and small cap funds
| Particulars | Large Cap | Mid cap | Small cap |
| Ideal investor profile | Conservative investors with a long-term investment horizon | Moderately risk-tolerant investors with a long-term investment horizon | Aggressive investors with short-term goals |
| Availability of information on the companies | Often less volatile and highly liquid | Slightly volatile and quite liquid | Highly volatile and not very liquid |
| Risk | Possess relatively lower risk | Riskier than large cap | Considerably riskier |
| Potential for growth | A higher potential to generate stable returns | Moderate potential for growth | Considered to be high |
Penny Stocks
Penny stocks are a form of market traded security which attracts minimal pricing. These securities are mostly offered by companies with lower market capitalisation rates. Therefore, these are also called nano-cap stocks, micro-cap stocks, and small-cap stocks, depending on the company’s market capitalisation.
A company’s market capitalisation rate is determined based on the product of the current price of its shares or stocks.
Features:
Limited historical information
Most of the stocks of relatively young companies with limited historical information. The companies generally lack a proven track record regarding operations, products, assets, or revenues. Therefore, investing in such companies is extremely risky.
Low liquidity
Since many of the penny stocks are traded over-the-counter, the liquidity of the stocks is low. An investor may not always be able to sell the shares at the right time. Also, the low liquidity results in low trading volumes. Thus, even relatively small transactions can cause large swings in the price of the shares.
Lack of public information
The microcap companies that issue penny stocks are not required to file reports with the regulatory authorities (e.g., SEC). In addition, these stocks are not covered by professional stock analysts from designated financial institutions. Therefore, potential investors may not find sufficient resources to make an informed investment decision.
No minimum listing requirements
Since penny stocks are primarily traded over-the-counter, the companies that issue these stocks are not required to meet certain minimum requirements for the listing.