SM Trader: Market Capitalization | Share Market Learning Series | CALCULATION, CLASSIFICATION, RISK & RETURN FACTOR Market CAP

Market Capitalization

In this blog, we will discuss about Market Capitalization, which is an important topics in the stock market investing.

Let’s start with a generic question. The stock prices of two companies are given below.

MRF= Rs 65,472
HDFC Bank= Rs 1,772

What do you think? Which company is bigger?
If you think that MRF is a bigger company as its share price is too large compared to HDFC bank, then you will get surprised by end of this blog.
You cannot judge the size of the company just by looking at its Share Price.
To understand the answer of the question about which company is bigger, you need to understand the concept of market capitalization.
So, be with me for the next 5-6 minute to learn everything about market capitalization in stock market.
Here are the contents which are going to cover in this blog:

Classification of companies in Indian stock market.
What is Market Capitalization?
How companies are classified using market capitalization in Indian stock market?
What are large, mid and small cap companies? – With examples
What are Blue Chips stocks?

Definition:

Market capitalization 💪 shows the size of the company and its aggregate value.
Let us define market capitalization now:
Market Cap or Market capitalization refers the total market value of a company’s outstanding shares.
It is calculated by multiplying a company’s outstanding shares with the current market price of one share.
Outstanding Shares refers to all shares currently owned by stockholders, company officials, and investors in the public domain.
The shares of the promoters/owners is not included in outstanding shares.

Market Capitalization = (Total no of outstanding share) * (Price of one share)

Example:

Let us assume for a company ABC, with total number of outstanding shares= 1,00,000
Current price of 1 share of ABC company = Rs 1,500
Market capitalization = 1,00,000* 1,500 = Rs 15,00,00,000
Therefore, the market capitalization of company ABC is Rs 15 Crores.

Now, let us move back to our original question. Which company is bigger? HDFC Bank or MRF?
We need to find the market capitalization of both these companies to figure out which one is bigger.
For MRF, (All figures are for learning purpose not a real figure)

From the above calculation, we can notice that the market capitalization of HDFC bank is over 17 times that of MRF.
Hence, HDFC bank is much bigger company than MRF.
The sky rocketing share price of MRF is insignificant when we compare the total number of outstanding shares of MRF with HDFC bank.
In short, Share price cannot decide the size of a company. It’s the market capitalization which is used to classify the companies based on size.

Market cap is important because it gives investors an idea of a company's size, risk profile, and overall market value compared to other companies.
It’s also a tool for diversifying investment portfolios, balancing risk, and identifying growth opportunities.
For investors, understanding market cap helps gauge the potential of a company, although it’s important to consider other factors like earnings, growth prospects, and industry trends when making decisions.
In Part - 2 continuation, we will see about classification of share market based on market capitalization & other factors involved based on market CAP.

Keep Learning 🕮

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