What is market capitalisation, its category and why is it important?

Are you new to the stock market and have just opened a demat account due to fear of missing out on the ongoing rally, but don’t understand which stock to invest in? Well then, we will help us understand one of the most basic things that can help you decide in which direction you want to go.

First things first let us understand the meaning of market capitalisation as stocks in the stock market are often classified based on their market capitalisation (or market cap).

Market capitalisation refers to the aggregate value of the company based on its current share price and the total number of outstanding shares. It is calculated by multiplying the total number of outstanding shares of a company in the market by the current price of each share.

To make things simpler, let us consider the meaning of market capitalisation with the help of an example. Suppose that ABC Company has 1,00,000 outstanding shares in the market and each share of ABC Company is priced at Rs 100. Then, the market capitalisation of ABC Company will be calculated as follows:

Outstanding shares x price per share

1,00,000 x 100 = Rs 1,00,00,000.

Therefore, the market capitalisation of ABC Company is Rs 1,00,00,000.

Companies that are traded on the stock exchanges are usually divided into three broad categories: large-cap, mid-cap, and small-cap. Let us learn about each of them in detail.

Large-cap stocks

Large-cap stocks are well-established companies commanding a significant market share and dominate the industry as well as have very stable business models. They usually have market caps of Rs 20,000 crore or more. They hold themselves well in turbulent times. Besides, they decades of existence and a good reputation. If you want to invest in a company’s stocks by taking less risk, then large-cap stocks are a good option. They are less volatile in comparison to mid-cap and small-cap stocks.

Reliance Industries and Infosys are examples of some large-cap market companies that are listed on the stock exchanges of India. Their strong foothold in the market and consistently good performance makes them good choices for long-term investors.

Mid-cap stocks

Mid-caps are those stocks whose market cap is more than Rs 5,000 crore but less than Rs 20,000 crore. Investing in these companies can be riskier compared to large-cap companies as they are more volatile. On the other hand, mid-cap has 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.

Metropolis Healthcare, Castrol India, and Relaxo Footwears are some examples of mid-cap companies that are listed on the stock exchanges of India.

Small-cap stocks

Small-cap are those stocks 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 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.

Engineers India, Vakrangee and Kaveri Seeds are some of small-cap companies that are listed on the stock exchanges of India.

Why market-cap is important?

Market capitalisation plays a significant role in one’s stock portfolio. As the share market passes through different phases, the performance of large-cap, mid-cap, and small-cap stocks also changes. For instance when large-caps are not doing well, mid-caps and small-caps could be on the rise. And when mid-caps or small-caps are plummeting, the large-caps in could steady your overall returns. So, it is important for stock investors to diversify their portfolio by investing across market caps. It will help your portfolio to tide you over changing market conditions.