What is Market Cap?
Market capitalization refers to the total number of outstanding shares of a company in the market multiplied by the current price of each share. It is a measure of the estimated valuation of a company.
Let us take an example to understand this better. Suppose, XYZ Company has 10,000 outstanding shares in the market and each share is priced at INR 10. Then, the market capitalization of XYZ Company will be calculated as follows:
Outstanding shares x price per share
10,000 x 10 = INR 1,00,000
Therefore, the market capitalization of XYZ Company is INR 1,00,000.
The stocks that are traded on the market can be categorized into three broad categories: large cap, mid cap, and small cap.
Large Cap Stocks
Large cap companies are businesses that are well-established and have a significant market share. Large-cap companies have market caps of INR 20,000 crore or more. These companies dominate the industry and are very stable. They hold themselves well in times of recession or during any other negative event. If you want to invest by taking minimal risk , then large cap stocks are a good option. These stocks are less volatile in comparison to mid-cap and small cap stocks. The lower volatility makes them less risky.
Reliance Industries and Britannia are examples of some large cap market companies that are listed on the stock exchanges of India. Their strong foothold in the market and consistent good performance makes them good choices for long-term investors.
Mid Cap Stocks
Mid cap companies are companies whose market cap is above INR 5,000 crore but less than INR 20,000 crore. Investing in these companies can be riskier than investing in large cap market companies. This is because mid caps tend to be more volatile. On the other hand, these companies offer a higher growth potential.
Crompton Greaves, Relaxo Footwears and LIC Housing Finance are some examples of mid cap companies that are listed on the stock exchanges of India.
Small Cap Stocks
Small cap companies are those that have a market capitalization of less than INR 5,000 crore. These companies are relatively smaller in size and have significant growth potential. What makes them risky is the low probability that they will be successful over time. This makes the stocks of such companies volatile in nature.
Can Fin Homes, JK Paper Ltd and Bajaj Consumer Care are some examples of small cap market companies that are listed on the stock exchanges of India.
Difference between Large Cap, Mid Cap and Small Cap in Terms of Risk
Large cap companies are large and stable businesses with the capability to wither market volatility. Their growth potential may be low, but so is the risk. And these funds generally bring modest but consistent returns over the long term.
Mid cap ones have a relatively higher potential for growth (and thus, the possibility of higher returns). However, they also come with higher risk.
The risk exposure is the highest with small cap stocks, as small cap companies are not well-established. But when a small cap does well, the possibility of growth is higher than for mid caps and large caps. Despite the higher risk, there is a possibility of relatively higher returns.
Balanced Investing for Longevity
As the share market passes through different phases, the performance of large, mid, and small cap stocks varies. So, it is important for investors to diversify their portfolios by investing across market caps. It will help you withstand adverse market conditions and emerge triumphant.
Always try to maintain a balance of large, mid and small cap stocks in your portfolio. In the long run, this will even out your losses and consolidate your gains.