What are the three main market cap classifications?

What are the three main market cap classifications?

Updated: 06 Jun 2022, 05:22 PM IST
TL;DR.

There is a significant difference between the stocks of large-cap, middle-cap and small-cap companies in the share market, and every investor must understand the difference. It is imperative to first know the concept of market capitalisation. Read further to know more about it

Market capitalisation is defined by the value of a company’s shares that are listed on the stock exchange.

Market capitalisation is defined by the value of a company’s shares that are listed on the stock exchange. It reflects the combined value of the company’s total number of outstanding shares. This is based on the market value of the company’s shares. Now, the value of the share is described through a certain criterion, as follows.

For instance, consider that the share price of company X is Rs. 50 and the share price of company Y is Rs. 100. Since share price alone cannot determine the value of the company, we will further consider the number of outstanding shares of that particular company in the market.

Let company X has 200,000 shares and company Y has 100,000 shares in the market. So, we can now calculate the value of these outstanding shares.

Company X: 100,000 x 50 = Rs. 50 lakhs

Company Y: 200,000 x 100 = Rs. 2 crores

Based on this calculation, we found that company Y has a higher market value in comparison to company X. Thus, the formula used to estimate the value of companies is – Value of the company = Share price of the company x number of outstanding shares.

Every company in the market has a different market cap based on its value. Considering the company’s market cap, they are classified as large-cap companies, mid-cap companies or small-cap companies. The Security Exchange Board of India (SEBI) has laid a set of norms to classify companies based on their market capitalisation.

All the companies listed from 1st to 100th positions in terms of their market capitalisation will fall under large-cap companies. Similarly, the companies from 101th to 250th positions come under mid-cap companies. Finally, the companies from the 250th position onwards are classified under small-cap companies based on their market cap.

Anyhow, the fact that the share market is volatile cannot be ignored and thus the market cap of every company keeps fluctuating and that changes the list of companies that fall under large-cap, mid-cap or small-cap.

Moving further, it is important to also learn about large-cap, mid-cap and small-cap funds available in the market.

Large-cap funds

These are the funds that are majorly invested in large-cap stocks, i.e., stocks of large-cap companies. All the companies under large-cap are considered to be reliable, given their wealth generation and performance records.

Large-cap funds are widely known as open-ended funds out of which 80% goes invested in large-cap stocks. Large-cap funds are the least risky ones as they invest in huge companies, mostly including NIFTY 50 companies that have stability. These funds require investors who can expect high returns in the long run.

Mid-cap funds

Mid-cap funds are also open-ended and equity funds that invest 65% of the assets in mid-cap companies. Mid-cap companies are those that have the potential to become large-cap companies.

Mid-cap is the middle ground where the company extensively grows with manageable risks. Anyhow, these funds are riskier than large-cap funds but less risky than small-cap funds. Nonetheless, there has been a significant development in all the mid-cap companies.

Small-cap funds

These equity funds invest at least 65% of their total assets in the stocks of companies under small-cap. All the companies under small-cap are very new to the market and thus investment in these companies face bigger risk. However, there could be a possibility of growth as well. Only those investors who can manage big risks are advised to invest in these funds.

However, investment in any type of caps is based on the investment goal and choice of the investor. Thus, investors must consider several factors like risks, returns and opportunities for growth before choosing any of them.

Market fluctuations usually impact small cap funds relatively more vis-a-vis large cap ones.
First Published: 06 Jun 2022, 05:22 PM IST