Explainer: What is Market Capitalization?

Market capitalization (market cap) means the total market value of a company’s outstanding shares. It shows the size of a company and its aggregate value. It is calculated by multiplying the total number of a company’s outstanding shares by the current market price of one share. For example, If a company has 1,000 shares, each with a closing price of Rs100, the total market cap of the company would be ₹1,00,000 (1000×100). It is also important to note that market cap can be calculated for public listed companies only.

Importance of market capitalisation

The need to consider market capitalisation of a company before investment is an absolute necessity for all the investors. The importance of the same has been elaborated further ahead.

Universality

This is the most widely used method of calculating a company’s worth across the globe. This makes it credible for the investor to evaluate any company’s value irrespective of its geographic locus.

Precision

Market conditions are always subject to risks because it is affected by many factors at a time but market capitalisation is still very precise in its estimation.  It is the most preferred way to judge the investment risks involved with the company.

Impacts the Index

Market capital is used to weigh the shares of varied companies for the share market’s index. Company stocks with higher market capital get better weigh in the index.

Helps in comparison and balance

It is the most convenient way for investors to compare different companies which not only determines the size of a company but also the risk associated with them. At the same time, market capitalization indicates the investor to maintain a balanced portfolio by suggested investment in top companies as well as developing enterprises.

Types of companies based on the market capitalisation

As per the market capitalisation, there are three different types of stocks available in the share market for an investor to choose from. Balancing your investment with a good mix of these three can minimise risks.

Association of Mutual Funds in India (AMFI) recategorizes company stocks based on market capitalization every six months.  The top 100 stocks are termed as large caps, 101-250 qualify as mid caps and those below 250 are known as small caps.

Companies with MCap above ₹20,000 crore are often termed as Mega-Cap Stocks.

Factors which impact the market capitalization

• Demand for the product or service and the company’s ability to serve the same
• Fluctuations in the market
• Performance and ingenuity of competitor brands
• Reputation and reliability of a brand

Top 10 Indian companies based on market capital as on January 13, 2021