Understanding the value and risk associated with a company is a key factor an investor should consider before making an investment. Companies are often classified based on their market capitalisation as large-cap, mid-cap and small-cap. Here, we will tell you key differences between the three market cap classifications.
What is market capitalisation?
Market capitalisation denotes an estimated valuation of a company. In simple words, the market cap is the total market value of all of the shares held by shareholders of a company.
To calculate the market cap of a company, one has to multiply the total number of shares held by its shareholders by the current market value of the stock.
Market capitalization = Outstanding shares x Current market price per share
For instance, if a company has 10 lakh outstanding shares and the price of the stock currently trades at Rs 100 per share, then the market cap for the stock will be as follows.
Market Cap = 10 lakh shares x Rs 100 = Rs 1000 lakh
Key difference: What are small-cap, mid-cap and large-cap stocks?
Market Capitalisation
Large-cap companies have a market cap of Rs 20,000 crore or above. The market cap of mid-cap companies is between Rs 5,000 crore and less than Rs 20,000 crore while the small-cap companies have a market cap of below Rs 5,000 crore.
Volatility
Investment risk is closely related to volatility in the stock market. Large-cap stocks tend to be less volatile. In simpler terms, the stock prices remain relatively stable even amid turbulence, making them relatively low-risk investment options.
Meanwhile, mid-cap stocks are slightly more volatile than large-cap stocks. On the other hand, small-cap stocks are highly volatile, which increases the risk for investors.
Growth potential
The growth potential of large-cap stocks is lower than the growth potential of mid-and small-cap stocks. Since large-cap stocks are a stable investment option. Large caps are well suited to investors with low-risk appetites.
Mid-caps are suited for investors with a risk appetite that is moderate, these have a slightly higher potential for growth.
The highest growth potential lies with small-cap stocks, but these require one to have a high tolerance for risk.
Liquidity
The term ‘liquidity’ means that investors can buy or sell large-cap shares quickly and easily without affecting the share price.
Large-cap stocks tend to have higher liquidity due to the high demand for large-cap shares in the stock market. Therefore, squaring off positions is easier.
Meanwhile, mid-cap companies have lower/ moderate liquidity. Small-cap companies have the least liquidity, which means squaring off positions can be more difficult.
Company Type
Large-cap companies are big and well-established companies in the equity market. These have reliable management and rank among the top 100 companies in the country.
Mid-cap companies lie somewhere between large-cap and small-cap companies. These companies are compact and rank among the top 100–250 companies in the country.
Small-cap companies are much smaller in size but do have the potential to grow rapidly.
Also, read- Budget 2023: What is Finance Bill and how is it different from Money Bill?
