What is Market cap (market capitalization) in Stock Market ?

WHAT IS MARKET CAPITALIZATION ?

Market Capitalization also known as market cap, is the value of company's share as per investors. It is value of company's share in the market. It can also be referred to as the market value of company's shares. 

This figure is obtained by multiplying number of outstanding shares of the company by its current price. Here outstanding shares are referred to as the shares held by public, promoters, investors, employees, etc.

Let us consider a company with the stock price of 50 rupees and it has 10 crore outstanding shares. The market cap of this company would be 500 crores. Open any company in the search box on moneycontrol.com website and scroll down, you will find market cap in the statistics section.

FACTORS AFFECTING MARKET CAP

Since market capitalization is made up of two factors market price and number of outstanding shares, so any change in these two quantities leads to change in market capitalization.

Factors affecting share price

There is no formula for calculating price of share. Share price works on the principle of demand and supply. Share price depends on 3 major factors :

-) Technical factor

-) Fundamental factor 

-) Market sentiments 

Other sub factors on which ups and downs may depend are inflation, trends, liquidity, market news, dividend distribution, increase in any fundamental factor, etc.

Factors affecting number of outstanding shares 

Factors affecting number of shares are stock splits, dividends, shares buyback etc. Factors such as a stock split may not change number of outstanding shares because they are divided on the basis of ratio. If you own 10 shares, they will be doubled to 20 and share price be halved.

TYPES OF COMPANIES ON THE BASIS OF MARKET CAP

Large cap

Large cap stock are companies with the market cap of more than 10 billion dollars (more than 75,000 crores) are said to be large cap stocks.

These businesses offer good service, steady growth in share price and performance, consistent dividends, etc. Such stocks are considered as safe investments where there is less aggressive growth and hence less risk.

Reliance industries(9.9 lac crores), TCS(7.2 lac crores), HDFC Bank(5 lac crores), Hindustan Unilever(4.8 lac crores), ITC(1.9 lac crores), UltraTech Cement(97 thousand crores), Asian Paints(1.5 lac crores), Avenue Supermarts(1.4 lac crores), etc are some well known examples of large cap stocks.

Mid Cap

Mid cap stock are companies with market cap range from 2-10 billion dollars (15,000-75,000 crores) are said to be mid cap stocks.

These businesses offer good services in the market. This phase is a phase where a company has the massive speed of growth. Since more gain, such stock are risky as compared to large cap stocks, but are safer than compared to small cap stocks. Companies offer aggressive returns and have the potential to become a large cap stock.

Examples of mid cap stocks are Ruchi Soya(17,209 crores), Mind Tree (14,811 crores), Symphony (5,806 crores), Voltas (15,435 crores), Castrol (11,938 crores), Tata Power (7,613 crores) etc. The above figures may not exactly match the bandwidth of market caps since stocks markets continuously keeps on changing.

Small cap

Small cap stock are companies with market cap range from 300 million -2 billion dollars (2,000-15,000 crores) are said to be small cap stocks.

These companies are less publicly traded as compared to large cap and Mid Cap stocks. Most of the shares of such companies are held by institutional investors, company employees or insiders. They are available at a very low evaluation since most of the market is focused on large and mid cap stocks. 

Examples of some small cap stocks are : VIP industries (3, 304 crore), TV18 broadcast (3,857 crore), Eveready India (474 crore), ADF foods (413 crores), Gufic bio (438 crores) etc. 

ADVANTAGES OF MARKET CAP

-) It helps new investor to build a balanced portfolio.

It is said that a wise investor should have 60%of his portfolio in large cap and 40% of his portfolio in mid cap. This (60-40) ratio may differ from investor to investor based on his experience in market.

 -) Market cap offers investors an easy method to value a company in expectation of safe and risk managed return. According to market capitalization, it will be a better idea to invest in ITC Limited(2.01 lac Cr) as compared to Avanti feeds (5,200 Cr). 

-) It makes it easy for investors to evaluate a company based on size.

With the help of market cap, we can make a difference in size of Emami (8,322 Cr) as compared to Hindustan Unilever Limited (4.7 lac Cr).

-) It helps in understanding the value of company according to investors and market. 

INVESTING IN LARGE CAP STOCKS 

Advantages

-) Such companies provide a continuous dividend.

Some recent dividend paying companies were Infosys, Hero MotoCorp, Indiabulls Finance Limited, HPCL, BPCL, etc. If we observe most of them are large cap companies.

-) Their earnings are stable.

-) Companies listed are highly reputable and provide an appreciable return (15-40% as an average). 

Reliance industries, Hindustan Unilever Limited, Hdfc Bank, Asian Paints, etc are some well known and established companies.

-) Most of the large cap companies have a diversified business portfolio. Such company are managed by well known asset management firms and partners.

-) Large cap companies do not go out of business in cases of economic instability.

-) These stocks are easy to buy and sell as they have very high trading volume on stock exchange. 

Disadvantages

-) Mostly, large cap companies witness low growth as compared to mid and small cap companies. 

-) They do not give any unexpected returns in a growing market.

INVESTING IN MID CAP STOCKS

Advantages

-) Mid cap stocks provides more growth opportunity as compared to large cap. They have the power to give an unexpected return.

-) These stocks are generally less risky as compared to small cap since they learned from the blunders which the small caps are vulnerable to.

-) Mid cap industries have more liquidity as compared to small cap industries.

-) On analyzing history, mutual funds of mid cap stocks always gave more returns as compared to large cap companies.

-) Mid cap stocks are more economically feasible as compared to large cap stocks.

Disadvantages

-) They give fewer returns on growth as compared to two small cap stock.

-) Mid cap stocks may hurt investors in case of market crash. In the case of large cap, they often survive market crashes.

INVESTING IN SMALL CAP STOCKS

Advantages

-) High growth potential : Small cap stocks have a very high growth potential. At this stage, the company is about to start expansion of its business. They offer returns more than large cap and mid cap stocks. Hence, these stocks are also known as rapid exponential growth stocks.

-) Good investment for wise investors : All the institutional investors are focused at large and mid cap stocks. Since they aim at a safer return, these small cap stocks are kept untouched. This is the reason for small cap stocks being undervalued. This gives a good opportunity for wise investors to grow their assets. 

-) More unit for less amount : If you had rupees 10,000 in the year 2000, you could have bought 143 shares of Reliance (when it was a small cap stock) at 70 rupees each. Now (when Reliance became large cap stock) only 6 shares can be bought in 10,000 at rupee 1500 each. Hence, small cap stocks offers more quantity for less amount of funds.

Disadvantages

-) Very high risk : Since reward is high, risk is also maximum. 

-) Lack of financial knowledge : Information about a small cap stock available is less than compared to mid and large cap stocks. 

-) It is also difficult to get news on any small cap stock since most of the institutional investors focus on mid and large cap stocks only.

-) Low liquidity : To carry out expansion of a business company needs to burn cash. Such reasons lead to lack of liquidity.

-) Time-consuming : Good amount of time is needed for a small cap stock to grow to its full potential henceforth small cap investments are more time-consuming.

-) Difficulty in surviving market crash : Due to low liquidity, small cap stocks have the least ability to survive market crash as compared to large and mid cap stocks. 

DRAWBACKS OF MARKET CAP

-) It does not give any knowledge regarding debt burden of the company.

-) It does not give any knowledge about cost involved in operation or cost involved in manufacture of product.

-) Returns such as dividends are not included or has any effect on market cap.

INVESTOMANTHAN'S ADVICE !

Beginner in equity investment 

If you are new to stock market strategy of 90-10 principle can be followed, where 90% of portfolio value in large cap stocks and 10% in mid cap stocks.

Experience of 3 to 4 years in market 

Strategy of 60-40 principle can be followed, where 60% of portfolio value in large cap stocks and 40% in mid cap stocks.

Experience of 5 to 6 years in market 

There is no recommended strategy if you have a successful experience of 5-6 years in equity market. If you want to play it safe, you can go for 50-50 or 40-50 principle.

Investing in small cap stock

Investing in mutual fund for small cap stocks can be considered as the safest strategy of investing in small cap stocks. In the history of stock market, small cap mutual funds have always outperformed.