If you’re a beginner who is only just venturing into stock trading , or even if you’ve been dabbling the markets for a while but have no deep understanding of the many concepts associated with equity, you may find much of the terminology associated with equity trading vague or unclear. This particularly true when you’re searching for the kind of stocks to invest in next or what type of mutual funds to purchase
When you pose a query about this dilemma online, you’ll find a variety of suggestions and opinions. Some may give you the names of the stocks or funds to pick up next, while others may give you broader pieces of advice, like investing in large cap funds or steering clear of small cap funds.
But what do the terms small cap, mid cap, and large cap mean? And what is the difference between large cap, mid cap, and small cap? To understand these things, it is important to begin at the basics and understand what market cap represents.
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 simpler words, the market value of all the shares that are held by a company’s shareholders is known as the market capitalization
Let’s look at a quick example to understand this better.
Say there’s a company whose shares are listed on a stock exchange. If the company has around 10 lakh shares currently trading at Rs. 500 each in the stock market, the market capitalization of that company would be Rs. 50 crores (10 lakh shares x Rs. 500 each).
That should give you some insight into the formula for the market cap of a company, which goes as given below.
Market capitalization = total number of outstanding shares multiplied by the market price of each share
Based on the market capitalization, companies are classified into three different categories:
What are small cap, mid cap and large cap companies? And what is the difference between large cap, mid cap and small cap stocks? In the year 2017, the Securities and Exchange Board of India laid down certain rules to classify companies according to their market cap. This was done with an intent to maintain uniformity in the financial markets, in the context of investments and trading.
Let’s get into those details.
According to SEBI’s rules, all companies that are listed on the stock exchanges are ranked based on their market cap. And the top 100 companies are categorised as large cap companies. Then, what are large cap funds? Mutual funds that invest in the stocks of these large cap companies are categorised as large cap funds.
Large cap companies generally have an excellent track record. The market cap of these companies is generally significantly high, coming in at around Rs. 20,000 crores or more. These stocks are also often included in broad market indices such as NIFTY and SENSEX, primarily because they command a very strong market presence.
As per SEBI’s classification, the companies ranked from 101 to 250 in terms of market capitalization are known as mid-cap companies. Their market cap generally tends to range from Rs. 5,000 to Rs. 20,000 crores. Since mid cap companies have a moderate to strong market presence, they may or may not be widely included in broad market indices.
SEBI’s rules state that all the companies that are ranked from the 251st position onwards in terms of market cap are automatically categorised as small-cap companies. Small-cap companies generally don’t have a long track record. These companies could either be relatively new start-ups or they be businesses that are still in the developmental stage.
In terms of market cap, these companies generally come in below Rs. 5,000 crores. And consequently, these companies tend to enjoy little to no market presence, and so, are mostly not included in broad market indices.
|Particulars||Large cap||Mid cap||Small cap|
|Ideal investor profile||Conservative investors with a long-term investment horizon||Moderately risk-tolerant investors with a long-term investment horizon||Aggressive investors with short-term goals|
|Risk||Possess relatively lower risk||Riskier than large cap||Considerably riskier|
|Availability of information on the companies||Often less volatile and highly liquid||Slightly volatile and quite liquid||Highly volatile and not very liquid|
|Potential for growth||A higher potential to generate stable returns||Moderate potential for growth||Considered to be high|
Now that you know what small cap, mid cap and large cap are, and what the difference between large cap, mid cap and small cap funds are, you can make a more informed decision about the kind of companies and funds to invest in. The Association of Mutual Funds of India periodically releases a list of stocks according to their market capitalization, based on the data provided by Bombay Stock Exchange (BSE), National Stock Exchange (NSE) and Metropolitan Stock Exchange of India (MSEI).
Before you invest in mutual funds, make sure you get to check out the most recent list to know the companies in which the funds invest your money, so you can verify if they are aligned with your risk profile and your investment goals.