Market Capitalization | PART - 2 | Share Market Learning Series | CALCULATION, CLASSIFICATION, RISK & RETURN FACTOR Market CAP

Market Capitalization

In this blog, we will continue to discuss about various classification of Market Capitalization and their risk & return parameters. in stock market investing.

Classification based on Market Capitalization:

• Any company in Indian stock market can be classified in one of the following category:

1. Large Cap
2. Mid Cap
3. Small Cap

• Here cap means capitalization. Although there are few other categories also like Mega cap, Micro cap etc, however they aren’t used much in classifying the stocks.
• These companies are classified based on their market capitalization, which we are going to discuss next.

Market Cap in Inidan Stock Market:

• How companies are classified using Market Capitalization in Indian stock market?
• There is no hard and fast way rule (criteria) to define the classification of the companies based on the market capitalization.
• If you refer different financial websites, the range of market cap will vary for different capitalization.
• However, in general, here is the commonly accepted classification of companies based on the market capitalization in Indian stock market.

Market Capitalization                        Classification

                    -----------------------------------------------------------------

    Less than 500 Cr                                Small cap

    Between 500 Cr to 10,000 Cr    Mid Cap

    Greater than 70,000 Cr                   Large cap

80-15-5 Rule:

• Why there in no fixed market capitalization range for classifying companies?
• Bombay stock exchange (BSE) uses the 80-15-5 rule to classify the companies in large cap, mid cap or small cap.
• Now, let me explain about this 80-15-5 rule.
• The rule classifies the different companies listed on the exchange based on the decreasing order of their market capitalization in Indian stock market.
• The largest market capitalization which covers up to 80% of the total market cap of all the listed company on the BSE are categorized as large cap company.
• The next set which covers the 80-95% of the total market capitalization of all the listed company on the BSE are categorized as mid cap company.
• Lastly, the set which covers 95-100% of all the listed company on the BSE are categorized as small cap company.

                % of Total Market Capitalization        Classification

                -------------------------------------------------------------------
                    80%                                                    Large Cap
                    15%                                                    Mid Cap
                    5%                                                      Small Cap

•  Since, the share price and market caps are dynamic; hence, there is no fixed market cap segment limit for classifying companies.
• Few years ago, companies with market capitalization around 10,000 crores- were considered to be large cap company. Now, they are mid cap company for this market cap.
• Most small cap companies are start-ups or in developing phase. They have a high growth opportunity. However, due to high failure rates of small caps, they also have a high risk.

Large, Mid & Small Cap Companies:

Large Cap Companies:

• “Every large cap company was a mid cap/ small cap once. However, every small cap company is not certain to become a mid/large cap.”
• Large Cap companies:
• They are big and well-established company. Most of the large cap companies are leaders in their sector and have a huge market presence. Many of the large cap companies are listed in Sensex 30 and Nifty 50. These companies have a very large capitalization to survive in adverse economic conditions. Here is the example of few large cap companies:
• Ex: Asian Paints, Axis Bank, Bharti Airtel, Hero Motocorp, ICICI Bank etc

Mid Cap Companies:

• These represent mid-sized companies that are relatively more risky than large cap as investment options, yet they are not considered as risky as small cap companies. These companies have a potential to become a large cap in few years and have enough finance to survive harsh economic conditions.
• Here are few examples of mid cap companies are Blue Dart, Jaiprakash Asso, Tata Global Bev, Videocon Ind etc

Small Cap Companies:

• These companies have small market capitalization and usually includes the start-ups or companies in the early stage of development. Small cap stocks are potentially big gainers as they are yet to be discovered within the sector. However, the risk level is high while investing in small cap companies.
• Here are few examples of small cap companies are Bombay dyeing, Sanwaria agro, Eros Intl, Prima plastics etc

Risk Return Table based on Market Cap:

• Here is a summary of risk and return based on the classification of  large cap, mid cap and small cap companies.

Criteria        Small Cap        Mid Cap        Large Cap

                ---------------------------------------------------------------------- 

Risk                Very high        High            Low

Return            Very high        High            Low

Liquidity        Low                  High            Very high

Summary:

• The various companies can be classified based on the market capitalization in Indian stock market as large, mid and small cap companies.
• A thumb rule for classifying them is shown below:

            Market Capitalization                        Classification

            ----------------------------------------------------------------

                Less than 500 Cr              Small cap

                Between 500 Cr to 10,000 Cr   Mid Cap

                Greater than 10,000 Cr   Large cap

• The selection of a company to invest depends totally on your preference.
• If you looking for a steady long-term investment, select large cap companies to invest.
• If you are looking for high profits and quick returns, then you should invest in small or mid cap companies.

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