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Understanding 'Market capitalization'
Market capitalization is the total rupee market value of all of a company’s outstanding shares. It is calculated by multiplying a company’s shares outstanding by the current market price of one share.
Market Capitalization = Current Stock Price x Number of Shares outstanding
E.g. Company XYZ has 10,000,000 shares outstanding and its current share price is Rs 8. Based on the above formula, we can calculate that Company XYZ's market capitalization is Rs 80 million, or 10,000,000 shares x Rs 8 per share.
Market capitalization may be classified differently by different market participants. On a general basis it can be classified in 3 groups when it comes to stocks -
*Here, the term 'cap' simply refers to the 'market capitalization' of the stock.
Differences between Large caps, Mid caps and Small caps
Small cap companies: have a market cap of less than Rs.2,000 crore. They are smaller companies, many of which recently went through their Initial Public Offering, or IPO. They are riskier, because they are more likely to default during a downturn.
Mid cap companies: are less risky, but may not have the same potential for growth. They typically have a capitalization of between Rs.2,000 crore and Rs.10,000 crore. They have lots of room to grow, and could become very profitable over the years while some of them that are fundamentally strong may also become large cap companies over the years due to their consistent profitable performance.
Large cap companies: have the least risk, because they typically have the financial resources to weather a downturn. Since they tend to be market leaders, they also have less room to grow. Therefore, the return may not be as high as small or mid cap stocks. On the other hand, they are more likely to reward stockholders with dividends. The market cap for these companies is Rs.10,000 crore or more.
Why should midcaps form a part of your portfolio?
Investments in the large cap companies provide good returns in the long run while investments in the mid cap companies replicate the risk relationship of your portfolio. Large cap equity investments provide stability to your portfolio, mid-cap investing provide quick growth to the fund.
Cautious Investing – the key to midcap investments
When markets are booming, returns from mid-cap stocks are good. However, mid-cap stocks may get affected more than large cap companies as they are more susceptible to the downturn in the economy. So any investor investing in midcap mutual funds should decide his risk appetite for the investment horizon and only then should he invest.