Market capitalization is defined by the value of a company’s shares that are listed on a stock exchange. It reflects the combined value of the total number of outstanding shares of the company. This is based on the market value of the company’s shares. Now, the stock value is described through a certain criterion, as follows.
For example, consider that the share price of Company X is Rs. 50 and the share price of Company Y is Rs. 100. Since the share price alone cannot determine the value of the company, we will take a closer look at the number of outstanding shares of this particular company in the market.
Let company X have 200,000 shares and company Y has 100,000 shares in the market. Thus, we can now calculate the value of these outstanding shares.
Company X: 100,000 x 50 = Rs. 50,000,000
Company Y: 200,000 x 100 = Rs. 2 crores
Based on this calculation, we have found that Company Y has a higher market value compared to Company X. So the formula used to estimate the value of companies is – Company Value = Stock Price of the company x number of shares outstanding.
Each company in the market has a different market capitalization depending on its value. Considering the market capitalization of the company, they are classified as large cap companies, mid cap companies or small cap companies. The Security Exchange Board of India (SEBI) has established a set of standards to classify companies according to their market capitalization.
All listed companies from the 1st to the 100th position in terms of market capitalization will fall under large capitalization companies. Similarly, companies in the 101st to 250th positions fall under mid-cap companies. Finally, companies from the 250th position are classified as small cap companies based on their market capitalization.
Be that as it may, the fact that the stock market is volatile cannot be ignored and hence the market capitalization of each company continues to fluctuate and this alters the list of companies that fall under large, mid or small cap.
To go further, it is important to also learn about the large, mid and small cap mutual funds available in the market.
Large Cap Funds
These are the funds that are predominantly invested in large cap stocks, i.e. stocks of large capitalization companies. All large-cap companies are considered reliable, given their wealth generation and performance histories.
Large-cap funds are widely known as open-end funds with 80% invested in large-cap stocks. Large-cap funds are the least risky because they invest in large companies, including stable NIFTY 50 companies. These funds require investors who can expect high returns over the long term.
Mid Cap Funds
Mid-cap funds are also open-end funds and equity funds that invest 65% of assets in mid-cap companies. Mid-cap companies are those that have the potential to become large-cap companies.
Mid-cap is the middle ground where the company expands broadly with manageable risks. Either way, these funds are riskier than large cap funds but less risky than small cap funds. Nevertheless, there has been significant development in all mid-cap companies.
Small Cap Funds
These equity funds invest at least 65% of their total assets in the shares of small capitalization companies. All small cap companies are very new to the market and therefore investments in these companies are more risky. However, there could also be room for growth. Only investors who can handle high risk are advised to invest in these funds.
However, investing in any type of caps is based on the investment objective and choice of the investor. Thus, investors should consider several factors such as risks, returns, and growth opportunities before choosing any of them.
Follow MintGenie for more stories like this