In this post, we are going to understand the basics of market capitalization. Also, we will see, how the companies are classified in the Indian stock market.
What is Market Capitalization:
Market capitalization is the total valuation of the company, it is calculated by multiplying a total number of outstanding shares with the price of one share.
Market Capitalization= Total number of outstanding shares* Price of one share
(Outstanding Shares: are the total number of shares issued and actively held by shareholders.)
Let’s understand with an example-
Let’s say a company ABC issues 15 lakh shares in the market at price ₹300 each.
So, Market Capitalization of ‘ABC’ = 15,000,00 * 300 =45,00,00,000= ₹45 crore
Market Capitalization shows the size of a company. It also helps investors to understand the worth and future scope of the company.
Companies classification in the Indian stock market on the basis of market capitalization :
Based on market capitalization, companies are broadly divided into three categories. Due to different benchmarks, the range used to vary. To ensure uniformity, SEBI (Securities and Exchange Board of India ) introduced a simple categorization, which is generally followed.
|Ranking (In terms of market cap)||Classification|
|Top 100 companies||Large-Cap Companies|
|101st to 250th||Mid-Cap Companies|
|251st onwards||Small-Cap Companies|
Note: the data given above is based upon the Latest circular of SEBI.
Large-cap companies (aka Blue-Chip companies) are generally the top 100 hundred companies in terms of market capitalization. These are well-established, nationally recognized and leaders in their sector.
- Their return potential is moderate and risk is low.
- Liquidity (ease of buying and selling stock without affecting price) is very high.
- These companies are considered to be mature and stable so Volatility(rapid fluctuation in price) is low during rough times of the market.
who should consider large-cap-
Due to stable growth, return potential is not as high as the mid-cap and small-cap. But these are the good option for an investor with a low-risk appetite seeking market exposure.
Mid-Cap Companies :
Companies listed 101st to 250th in the Nifty are considered as mid-cap companies.
- mid-cap companies have tremendous growth potential as compared to large-cap. The companies are well-reputed and have a great scope, so they get credit easily, which eventually helps them to expand their business and outperform in the market.
- these are well-established companies so the liquidity is high, but their financial health is not as stable as the large-cap which makes them volatile.
- these companies are considered riskier than the large-cap but less risky than the small-cap.
Who should invest in mid caps-
Investors seeking market opportunities to get high returns and have a longer time horizon (at least 3-5 years) can consider mid-caps.
Companies from 251st onward lies in small-cap companies.
- Small caps are largely affected by the recession and thus take time to recover and so they are considered risky but the return potential is very high.
- These are less liquid, investors find difficulty to sell the stock at a favourable price when the market goes down.
- these are volatile because these are in a growing phase and do not have enough money saved for the rough market time.
Who should invest in small-cap:
Investor, who has high risk-tolerance and have sound knowledge of the market, can get benefited from these.
|Large-cap||Moderate||Low||Very High||Low||Reliance , TCS, HDFC,|
|Mid-Cap||High||High||High||High||Adani Power,Aditya Birla F,Ajanta Pharma|
|Small-Cap||Very High||Very High||Low||Very High||Bombay Dyeing, Career Point|
To get the maximum and balanced return, one should diversify their investment into different types of option. Diversification allows individuals to explore different options with minimal risk.
well, the stock market is not the only option, there are multiple options available in the market which I can not cover in a single post. In the upcoming posts, you will get more exposure to different investment options available in the market. So, stay tuned and subscribe!
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