In the stock market, companies are mainly divided on the basis of market capitalisation (m-cap), which is basically the market value of all the outstanding shares held by the firm.
The market capitalisation of a company at any moment is determined by multiplying its total number of shares with its stock price at that moment.
Based on this, companies are classified into various categories. In the year 2017, the market regulator Securities and Exchange Board of India (Sebi) came out with different rules to classify companies as per their market cap. The three most common divisions among firms on the basis of their m-cap are large-cap, midcap and smallcap. Let's find a little about these and how they differ
Large Cap stocks are basically those stocks that have a market capitalisation of over ₹20,000 crore. or on a rank basis, the top 100 stocks of NSE or BSE are classified as large-cap stocks.
Large-cap companies are generally less volatile and least risky among the three, however, the stock prices of such stocks are comparatively higher than the other two which makes buying the large quality of such stocks a bit expensive for new investors.
Despite the higher price, large-cap stocks generally have a high potential to generate stable returns and are best suited for conservative investors with low-risk appetites.
These companies are also highly transparent and it is easier to find information regarding them. Another positive point is dividends, large-cap firms generally offer decent dividends to its investors which is highly unlikely in the case of the other two.
These stocks have an m-cap of between ₹5000 crore and ₹20,000 crore and are ranked between 101 and 250th positions on the exchanges. These are comparatively cheaper than large caps and are suggested for investors with a moderate risk appetite. Risks in midcaps are higher than large caps but so is the growth potential.
These stocks have an m-cap of less than ₹5,000 crore and are ranked from the 251st position onwards on the exchanges. These include small companies that are still developing. Such companies mostly go unnoticed by most investors. Stock price-wise, these are cheaper than both midcaps and small caps and hence could give substantial returns or drastic losses depending on the triggers. These are mostly suggested by aggressive investors with a very high-risk appetite for a small term.
These stocks are ranked after 500 on the exchanges in terms of market capitalisation. Even though there isn't a defined m-cap assigned to such funds, most of these stocks have an m-cap of less than ₹1,000 crore and are very volatile and risky.
Penny stocks are stocks that trade at extremely low prices and are very volatile. Investors are generally advised to stay away from suck stocks since they are mostly illiquid and do not have enough information available regarding their fundamentals.
Now that we have understood the basic division of stocks on the basis of market capitalization, one must still do proper research into companies before investing in stocks. Large Caps are the most stable and low risk while midcaps have moderate to high risk and small caps are the riskiest.