What is Market Capitalisation? All You Need to Know

What is Market Capitalisation: All You Need to Know

Market capitalisation or simply the market cap is one of the most important parameters to consider at the time of evaluating stocks before buying them. If you're new to the stock market, then you might have heard terms like small-cap, mid-cap, and large-cap. Know that these are the categories of market capitalisation. Let's learn more about the importance of market cap in detail! 

What is Market Capitalisation?

Market capitalisation refers to the total market value of a company based on the total number of its outstanding shares and its current share price. It is an important parameter of a company that is considered by potential investors in order to determine the risks and benefits of investing in that company. 

This is the simplest definition of market cap meaning. Now, let's see how it is calculated! 

How is Market Cap Calculated? 

Market capitalization in India can be easily calculated by simply multiplying the total number of outstanding shares of a company by its current share price. 

Here is the market capitalization formula:

Market cap = No. of Outstanding Shares * Current share price 

For example, if company X issues 1000 shares at a price of Rs. 100, its market cap will be Rs. 100000

Classification Based on Market Capitalization 

Based on the market cap, companies are classified into three categories: Large-cap, mid-cap, and small-cap. Let's discuss them in brief:

Large Cap – Large-cap companies are those with a market cap of more than 10,000 crores. These are usually well-established companies with considerable market share and value in the market. Note that the risk associated with these companies is very low as compared to the small and mid-cap companies due to low market volatility. This makes them a very good investment option for investors who are not willing to take a lot of risks. However, on the downside, the returns provided by higher market capitalisation companies are also low. 

Mid Cap – These companies have a market cap ranging between Rs. 2,000 crore to Rs. 10,000 crore. The risk associated with these companies is higher than that of large-cap companies, but much lower than that of small-cap companies because of higher volatility. The good thing about these companies is, they offer good returns at very low risk. 

Small-Cap – Small-cap companies are budding companies with a lot of growth potential. These companies have a market cap lower than Rs. 2,000 crores. Note that the stocks offered by these companies hold great potential for growth and profit, but are also very risky. 

Why Market Capitalisation is Important for Investors? 

Market capitalization is a very important concept for stock market investors because it allows them to understand and determine the value and performance of a company and compare it with others to make a better investment decision. It helps them to learn about past performance and predict the future performance of the company. 

By understanding the market capitalization of different companies, investors can make informed decisions regarding where to invest and where not to invest for achieving the desired returns. Now, the question is, which is better - large-cap, small-cap, or mid-cap? 

Companies in all three categories have great potential to provide investors with optimum returns. Note that all of these categories have their own set of pros and cons. While large-cap companies offer low risk, they offer low returns. On the other hand, small-cap involves higher risk but higher returns. Therefore, a good idea is to diversify your portfolio by investing in all three types of market cap companies to gain good returns in the future. 

Conclusion

Market Capitalization is an important factor that determines the overall value and performance of the company. This factor allows investors to compare different companies and make an informed investment decision by selecting the right stocks.