Stock market is full of thousands of concepts and terms. One such interesting and helpful term is Market Capitalization or Market Cap which has significant implication for traders and investors. In the following article you will get to know:
- What is Market Capitalization and it’s meaning and significance.
- Market Capitalization vs Market Value
- Market capitalization formula & how to calculate market capitalization
- Small Cap, Mid Cap & Large Cap definitions with examples
- Important points about Large Cap, Mid Cap & Small Cap Stocks
What is Market Capitalization: Its Meaning and Significance:
Market Capitalization is the combination of two words; market and capitalization.
Capitalization literally means conversion of income or assets into capital whereas market means a place where exchange of goods and services occurs. So combining these two terms we can define market capitalization. Therefore the meaning of market capitalization is, it’s the valuation or total value of a company in the eyes of investors and traders. To make it more simplistic we can say market capitalization tells one about the current value of a company arrived through the virtual consensus among shareholders.
The market capitalization or market cap has a significance as it tells investors and traders the value of a share therefore it helps them in deciding whether to buy a stock or not. But remember it’s a good way to understand the quantum or size of a company but it’s not a necessary indicator for buying a share or stock as at times traders buy shares and stocks based on the demand and supply factor and therefore they may ignore the market capitalization of a stock.
Market Capitalization Vs Market Value:
Although many people and shareholders think that both market capitalization and market value are same. For general talks this may be true but in truest sense there is a subtle difference in market capitalization and market value. Market capitalization only indicates the equity value of a company whereas market value considers many more factors to represent the financial worth of a company. For Market Value of a company or a share there are a lot of factors considered for example price to earnings, price to sales etc. Market capitalization needs only outstanding shares and the current share price of a stock.
Market Capitalization Formula & How to Calculate Market Capitalization:
Market Capitalization Formula:
Market Cap = Number of Shares Issued multiplied by Current Market Price of a share or stock
Market Cap = No. of Shares * CMP (in Indian Rupees)
How to calculate market capitalization:
For Example, we can simply calculate the latest market capitalization of Tata Motors by simply multiplying the share price of Tata Motors and the number of outstanding shares.
Market Capitalization of Tata Motors = Rs 335.3 (CMP) * 3169676471 (Shares Issued)
Market Capitalization of Tata Motors = Rs 1,062,792,520,726
Market Capitalization of Tata Motors = Rs 1,06,279 Crores (Approx)
Note: Since the market capitalization of tata motors is more than Rs 20,000 Crores therefore it qualifies as the large cap stocks.
Market Capitalization Types and Definition
Stocks can mainly be classified into three types:
- Large Cap Stocks
- Mid Cap Stocks
- Small Cap Stocks
Large Cap Stocks: As the name suggests these are the stocks which are having large market capitalization, meaning these are the stocks which are big in numbers; have great sales and revenue numbers and are into business for decades if not ages.
Typically in India if any company has the market capitalization of more than Rs 20,000 Crores then it is considered as the large cap stocks. Usually any large cap stocks in BSE-100 range in between Rs 20,000 crores to 35,000 Crores. Companies like SBI, TCS, Infosys etc are the good examples of Large Cap Stocks.
Generally Large cap stocks have following traits :
- Have Market Capitalization of more than Rs 20,000 Crores
- Safe to invests and there are many blue chip companies can easily qualify for large cap stocks.
- Are leading players in their sector and industry
- These stocks are liquid and therefore are much traded stocks on exchanges
- These companies are in operations for many years
- Most of the company has good corporate governance practices and therefore there are a lot information available on these stocks and companies in public domain.
Mid Cap Stocks: Mid cap stocks are the stocks which are in the middle stage of growth. Therefore these stocks are safer than small cap stocks to invest in but these stocks do have certain risks which are absent in large cap stocks. Mid cap stocks can bring good returns to investors in the next 3-5 years of operations.
Typically in India if any company has the market capitalization of more than Rs 5,000 Crores but less than Rs 20,000 Crores then it is considered as the mid cap stocks. Companies like Abbott India Limited, Adani Power, Amara Raja Batteries etc are
Traits of a Mid cap stocks are:
- Have market capitalization in the line of Rs 5,000 crores to Rs 20,000 Crores
- Stocks are a bit safe to invest in when compared with small cap stocks but risky when compared with a large cap stocks
- These stocks range in between on all major parameters like revenues, sales, employees etc when compared with the traits of small cap stocks and the traits of large cap stocks.
Small Cap Stocks: Small Cap stocks are those stocks which doesn’t fall under the category of Mid cap stocks and large cap stocks. Many people consider small cap stocks as risky and future multibagger stocks. Both the notions are wrong as both the cases are not the necessary traits of any small cap stocks.
Example of Small cap stocks are 5Paisa capital limited, ABG Shipyard Limited, Adhunik Metaliks limited etc.
Few traits of small cap stocks are:
- Have market capitalization of less than Rs 5,000 Crores
- Many a times stocks are risky to invest in from longer term perspective
- Information on such companies are less publicly available
- May have compliance and corporate governance related issues
- Requires a lot of years to become a large cap or a mid cap stock. This number usually could be more than 10 years.
Important points about Large Cap, Mid Cap & Small Cap Stocks:
- Every stock passes through the above mentioned three stages i.e. small cap stocks, mid cap stocks and large cap stocks.
- It may takes decades for a small cap stocks to become a large cap stocks
- Market capitalization category of any stocks may change over period of time. The change may be positive or negative as the market capitalization is the factor of CMP.
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(Note: The above list is for information purpose only. Avoid trading and investing based on the information given above. Before investing in stocks do due diligence)