What is Market Capitalization?
The technical definition of market capitalization, often dubbed as market cap, is that it is the market value of the outstanding shares of a company. In similar words, the market value of all the shares that are held by the company’s shareholders is known as the market capitalization.
It is not the share price but the value of the share. I ask you one question:
The share price of Company A is Rs.50 and that of Company B is Rs.60. Which company has more value? Which company will be more stable?
The answer to this question is not easy since the information provided is limited. Now, if we say that Company A has 700,000 shares in the market and Company B has 5,00,000 shares in the market, then which company has more value?
This makes more sense now. So, the total value of the outstanding shares of both companies is:
- Company A – 700,000 x 50 = Rs.3.50 crore
- Company B – 500,000 x 60 = Rs.3 crore
Hence, Company A has a higher market value than Company B. This is market capitalization or market cap. The formula to calculate it is:
Number of outstanding shares x share price
Difference between Large-cap, Mid-cap & Small-cap Shares.
Large-cap are big, well-established companies in the equity market. These companies are strong, reputable and trustworthy. Large-cap companies generally are the top 100 companies in a market. There is no consensus on the capitalization as such. Stocks of large-cap companies are the least risky investment instruments. Investment in large-cap is best suited for investors with low-risk appetite. The liquidity of shares of large-cap is very high because they are reputed, mature and firmly established players in the market. They are highly followed in the stock market and usually tapped by institutional investors.
Mid-cap are compact companies of the equity market, falling somewhere between small and large-cap companies and are 100-250 companies in a market after large-cap companies. Stocks of mid-cap companies are the riskier than large-cap but not as risky investment instrument as small-cap. Mid-cap shares have better growth potential and give investors higher returns on investment as compared to large-cap shares. Investment in mid-cap companies is best suited for investors with moderate risk appetite and is most popular among investors. The liquidity of shares of mid-cap companies is more as compared to small-cap companies. Highly followed in the stock market and usually tapped by institutional investors.
Small-cap are small companies in the stock market and are all the companies apart from large and mid-cap companies in a market. i.e., all companies above 250. Stocks of small-cap companies highly risky and volatile investment instruments. Small-cap companies have exponential growth potential and give investors high returns on investment. Investment in small-cap is best suited for investors with high-risk appetite and have good knowledge of the stock market. The liquidity of shares of small-cap companies is least. They are under followed in the stock market and usually untapped by institutional investors, giving a huge opportunity to wise investors to grow their investment quickly.
So, it completely depends on the investor’s ability to take risk and how much he is willing to put at stake.
