Breaking down equity: large cap, mid cap and small cap

Okay then. It’s time to make our way back to the equity market now. In this market, companies are often classified according to their market capitalisation. This ensures uniformity and gives investors like you a way to quickly gauge a company’s financial and market performance. 

Let’s first get into what market capitalisation means. 

What is market capitalisation? 

It’s quite simple actually. The market value of all the shares that are held by a company’s shareholders is termed as the ‘market capitalisation’ or simply, the ‘market cap.’ Let’s look at a quick example to understand this better. 

Assume there’s a company XYZ limited, whose shares are listed on a stock exchange. The company has around 1 lakh shares currently trading at Rs. 200 each in the stock market. 

So, the market capitalisation of XYZ limited would then be Rs. 2 crore (1 lakh shares x Rs. 200).

You can easily calculate the market capitalisation of a company by simply using the following formula. 

Market capitalisation = total number of outstanding shares X the market price of each share

Your next question would probably be this:  The share prices of a company listed in the stock market keeps changing. So, does the market capitalisation also change accordingly? The answer to the question is again pretty clear. Yes, the market capitalisation of a company also changes in accordance with the market price of the shares. 

That’s why the market capitalisation of a company is calculated every day, after the end of the trading hours. To calculate the market cap, the closing price of the company’s shares is taken as the market price.   

Classification of companies according to their market capitalisation 

Now that you’ve understood what market cap is, let’s see how it’s used to classify companies. Based on the market capitalisation, companies are classified into three different categories: 

• Large-cap
• Mid-cap
• Small-cap. 

What are small, mid and large cap companies? Let’s delve a little deeper into these three categories to understand them better.  

Large-cap companies

Remember SEBI? To maintain uniformity across the financial and investment segments, the market regulator, in the year 2017, decided to lay down certain rules to define the terms large-cap, mid-cap and small-cap. 

According to these rules, all listed companies are ranked based on their market capitalisation. And the top 100 companies in terms of market capitalisation are categorised as large-cap companies. 

These are some of the characteristics of large-cap companies.  

• Large-cap companies are generally trustworthy and have an excellent track record.
• These companies are well-established and have mostly been around for decades.
• The market cap of these companies is generally really high, at around Rs. 20,000 crores or more.
• Since they command a very strong market presence, they’re generally included in broad market indices such as NIFTY and SENSEX.
• Information on such companies, both financial and otherwise, is always readily available.  
• The stocks of such companies often tend to have low volatility and are highly liquid. 
• These companies also have a higher potential to generate stable returns and possess relatively lower risk.

Mid-cap companies

As per SEBI’s classification rules, companies ranked from 101 to 250 in terms of market capitalisation are categorised as mid-cap companies. 

Let’s take a brief look at some of the main characteristics of these companies to understand them better.  

• Mid-cap companies are also trustworthy and possess a good track record.
• These companies have been around for years. However, they are typically not as well-established as large-cap companies.
• Their market cap generally ranges between Rs. 5,000 to Rs. 20,000 crores. 
• Mid-cap companies have a moderate to strong market presence and may not be widely included in broad market indices.
• Dissemination of information on such companies is not very transparent. Therefore, company information may not always be publicly or readily available.  
• The stocks of mid-cap companies are liquid, slightly volatile and possess the potential to grow significantly. Although these stocks are riskier than those of large-cap companies, they often do have the potential for growth. 

Small-cap companies

All the other companies that are ranked from the 251st position onwards in terms of market capitalisation are automatically categorised as small-cap companies according to SEBI. 

Here are some of the general characteristics of these companies.

• Small-cap companies may not be very dependable since they don’t have a long track record. 
• These companies are either relatively new start-ups, or they may still be in the developmental stage. 
• Their market cap is quite low, usually below Rs. 5,000 crores. 
• Small-cap companies enjoy little to no market presence and are typically not included in broad market indices. 
• Information on these companies is generally scarce and is not publicly or readily available.
• The stocks of small-cap companies are considerably riskier, highly volatile and not very liquid. Irrespective of this, the growth potential of these stocks is still considered to be high.       

Wrapping up

So, we’ve seen the answers to questions like ‘What is small-cap?’ ‘What is mid-cap?’ and ‘What is large-cap?’ You’re now probably wondering if you should invest in large-cap, mid-cap, or small-cap companies? Well, that depends on your investment profile, on the capital you have to invest, the goals you plan to fulfill and a lot of other factors. Technical analysis and fundamental analysis can help you make smarter decisions about investing in large-cap, mid-cap, or small-cap companies. We’ll get into the details of these methods of analysis in the upcoming modules.

Also, aside from equity, there are also many other financial instruments that you can invest or trade in. We’ll look at these alternatives in the coming chapters. 

A quick recap

• The market value of all the shares that are held by a company’s shareholders is termed as the ‘market capitalisation’ or simply, the ‘market cap.’
• Market capitalisation is the product of the total number of outstanding shares and the market price of each share.
• The market capitalisation of a company is calculated every day, after the end of the trading hours. To calculate the market cap, the closing price of the company’s shares is taken as the market price. 
• All listed companies are ranked based on their market capitalisation. 
• The top 100 companies in terms of market capitalisation are categorised as large-cap companies. 
• The companies ranked from 101 to 250 in terms of market capitalisation are categorised as mid-cap companies. 
• All the other companies that are ranked from the 251st position onwards in terms of market capitalisation are automatically categorised as small-cap companies according to SEBI. 
• Technical analysis and fundamental analysis can help you make smarter decisions about investing in large-cap, mid-cap, or small-cap companies.