Understanding Small-Cap And Big Cap Stock
The prevailing market capitalization of a company is the basis for categorizing them under small-cap, mid-cap, and large-cap. The market capitalization of a company is calculated by multiplying the total number of its outstanding shares in the market with the present price per share. The figure depicts the market value of the company’s outstanding shares.
Take, for example, that company A has a price per share of Rs. 80 and Company B have a price per share of Rs. 100. To find out which of them has more value, the price per share will not be enough; its total outstanding number of shares need to be known too. Consider the outstanding shares for the two companies are as below:
Company A: Total number of outstanding shares: 5,00, 000
Company B: Total number of outstanding shares: 3,00,000
Market cap can now be calculated for the 2 companies:
- Market Capitalization of A = 5,00,000 x 80 = Rs. 4,00,00,000
- Market Capitalization of B = 3,00,000 x 100 = Rs. 3,00,00,000
Therefore, the market cap of company A is higher than that of B.
There is no fixed market cap value to differentiate a large-cap from the other two, however, to maintain a uniformity In defining the large, mid and high cap companies, SEBI defines them as:
- 1st company with the highest market capitalization till the company with 100th position in market capitalization will be considered a large-cap company
- The company at 101st position till 250th position will be considered a mid-cap company
- The company from 251st position onwards will be considered a small-cap company
Market capitalization is a dynamic number, and it keeps changing with time, below are some factors which lead to change in market cap:
- Change of share price during the day
- Change in the number of outstanding shares in the market; if the company issues more shares, its market cap increases, if it buybacks, the market cap falls.
Large Cap, Mid Cap & Small Cap companies
Mostly the Large-cap companies are well established, and investing in their shares is considered safe. Their market cap can be anywhere around Rs.1000 crore or above; however, it is not a standard figure, as market cap keeps fluctuating. Compared to the other two, Large-cap stocks tend to be less volatile and are more stable. Investors often hold stocks of large-cap companies to earn dividends. These stocks have high liquidity in the market as several investors are invested in these stocks, and it is easy to find buyers and sellers of these stocks.
Mid-cap companies are generally in their intermediate stages of growth. They are not yet established entirely into a stable business but do have the potential to reach the level of a large-cap company. Since these companies are on the growth curve, these are often appealing to the investors. Mid-cap stocks bear lesser risk than small-cap stocks, but higher risks compared to large-cap stocks.
Small-cap companies are generally in their initial phases or companies with small industry size. The publicly traded shares of these companies are fewer than those of mid-cap and large-cap companies. It is often stated that the share price of some small-cap companies fluctuates by significant percentages, so investors often track small-cap companies for spotting potential profit opportunities. However, that must be accompanied with proper research. These stocks have lower liquidity in the market, and an investor may find it difficult to find buyers or sellers during the day owing to the low trading volumes.
Investing in large-cap, mid-cap and small-cap companies
Since a balanced portfolio should comprise of a mix of shares with varying risks and returns, financial advisors often suggest investing in all the three types of companies to diversify the risks.
To invest in shares of companies, an investor needs to open Demat account online since shares can only be held electronically through the Demat account. Along with that, one will need a trading account to place buy and sell orders in the stock exchange.
Here, it makes sense to go for low brokerage charges Demat Account since it will help save on the brokerage cost. Brokerage is the fee levied by the stockbroker for the broking services. With discounted brokerage rates, you can save on brokerage and maximize your profits. So, why delay anymore, open your Demat & Trading Account and start tapping the share market opportunities.