When you are investing in the stock market, it’s better to get familiar with the various terms that are generally used by investors because you don’t want to be blank when someone talks about it. You might have heard “When in Rome, do as the Romans do.” It means that you should adapt to the situation you are in instead of being a complete stranger. You should learn and speak the language of the stocks when investing. Now, let’s look at what Large-Cap, Mid-Cap and Small-Cap means.
Market-Cap or Market Capitalisation is simply the value of all the shares of a particular company in the market. It indicates the total worth of the company. The Market-Cap of any company can be easily calculated as:
Market-Cap= Market Price per Share×Total No.of Shares
Total No. of Shares includes all the shares issued by the company which can be traded on the stock market.
Example: Suppose a company ABC Ltd. is trading today in the market at $1000 and the total no. of shares issued by the company is 1,000,000. Then
Market-Cap of ABC Ltd.=$1000×1,000,000
= $1,000,000,000 OR $1 Billion
So, the market-cap of a company will change every day because the price of the share fluctuates daily. Market-cap also gives us an indication about what the market thinks about the future of a particular company because it shows us what the investors are willing to pay for each share of that company. High Market Price per Share means high market-cap which says that investors are optimistic about the future of the company.
When a company wants to acquire another company, market-cap is one of the factors used to check whether the company that will be acquired represents a good value or not for the company that wants to acquire.
Apple Inc. recently became (on 19th August, 2020) the first U.S listed company to reach the $2 trillion market-cap. This shows that the investors are very positive that Apple Inc. will continue to grow over the years to come.
Large-Cap Stocks are of companies which are very huge in size and generally are less volatile in the tough times. These stocks are considered to be a safe bet because of their reputation and experience over the years. But these companies don’t have a huge growth potential simply because they are already too huge and expanded all over the world. Some famous Large-Cap companies include Apple, Microsoft, Reliance, Alibaba, etc. Large-Cap stocks are widely followed by investors and stock analysts all over the world. Don’t expect huge returns by these companies in the short term. But Large-Caps companies reward their shareholders by giving consistent dividends and you would get good returns if you are patient enough.
Mid-Cap Stocks fall between Large-Cap and Small-Cap. These companies have good potential for growth. They are less risky than the small-caps but more risky than the large-caps. Mid-caps provide a combination of both safety and growth. Some of the examples are MRF, TVS Motor, AECOM, etc.
These stocks are the most risky because they are new to the market and you can’t find all the data about the company and you don’t know whether it go bankrupt in a few years or will be one of the largest companies. Thus, the growth potential for small-caps is huge. They are a perfect example of High Risk, High Return Stocks. You never know which small company might become as successful as Microsoft or Apple. Some of the small stocks include Raymond, PVR, Unisys Corp., etc. The names can be relatively unknown because they are not well recognised yet.
Note that there is no single rule for division of companies among small-cap, mid-cap and large-cap. Different countries and different websites have their own way of classification. But let’s look at two of the cases so that you get some general understanding of how classification is done:
Large-Cap Stocks: Market Cap < = $10 billion
Mid-Cap Stocks: Market Cap between $2 billion and $10 billion
Small-Cap Stocks: Market Cap between $300 million and $2 billion
Large-Cap Stocks: Market Cap < = Rs. 20,000 cr
Mid-Cap Stocks: Market Cap between Rs. 5,000 cr and Rs. 20,000 cr
Small-Cap Stocks: Market Cap > Rs. 2,000 cr
Market-Cap gives us some idea about how big the company is. But remember that Market-Cap is not the only factor to decide in investing. There are a lot of other factors like the ratio analysis, reading financial statements, etc. that you have to take into consideration before investing in any stocks. Another thing to note is that don’t just focus on one type of market-cap company. Make sure your portfolio is well diversified between the small, mid and large-caps so that you get both safety as well as good returns on your invested money. Spread this knowledge to as many people as you can.