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Large Cap vs Small Cap vs Mid Cap Stocks

Choosing the right stock: Large cap, small cap, or mid cap? Decoding stock categories for smart investors.

market capitalisation

One of the major questions among new stock investors is about which stock is the best to invest in. There are different caps in the stock market– Large Cap, Mid Cap, and Small Cap. These market caps are often referred to as market capitalisation. It entails assessing the value of a publicly traded company by multiplying the current stock price by the number of outstanding shares.

Share market investors need to be knowledgeable enough to choose the appropriate stocks for their investing strategy. You may experience losses if you fail to know which stocks to invest in, given the market sentiment. The risk associated with the stock market is intrinsic and varies from one stock to another.

Different equities in the stock market are categorised as large-cap, mid-cap, and small-cap equities depending on their market capitalization (or market cap). Understanding the difference between small cap, mid cap, and large cap is important if you are going ahead with the investment.

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What is market capitalization?

Market capitalization is the company’s total number of outstanding shares multiplied by the share’s current market value. It serves as a gauge for an anticipated firm valuation.

For example, “ABC” Company has 20,000 outstanding shares with a price of Rs 20 per share. The outstanding shares multiplied by price per share 20,000 x 20= Rs 4,00,000.

So, the market capitalization of the ABC company is Rs 4,00,000.

What are large-cap stocks?

Large-cap market capitalization in India are shares of well-established companies with a significant market presence. Typically, these companies carry a market capitalization of around Rs 10,000 crore. They are more stable and less volatile compared to small and mid-cap stocks. They are well-known for their strong growth and huge profits, which gives them a strong market position. Additionally, these businesses provide investors with higher capital growth, consistent compounding, and regular payouts.

Also Read: Decoding the significance of market capitalisation

What are mid-cap stocks?

Mid-cap companies in India have a medium-sized market capitalization of over Rs 5,000 crore but less than Rs 10,000 crore. These companies are often in a growth phase, showing potential for expansion and increased market share. Mid-cap stocks can balance large caps’ stability and small caps’ growth potential.

Mutual funds for midcap companies aim to balance risk and return. These funds may offer good growth compared to large-cap funds due to the nature of investing in growth-stage firms. Moreover, they are less risky than small-cap funds, even if they are quite sensitive to market fluctuations.

What are small-cap stocks?

Small cap market capitalization in India is those with a market capitalisation of less than Rs 5,000 crore. These companies are often in the early stages of their growth and have the potential for significant expansion. Small-cap stocks tend to be more volatile and carry a higher risk level than large and mid-cap stocks.

Small businesses require time to develop. Therefore, an investor may choose small-cap funds based on risk tolerance and investing horizon. Small-cap funds should ideally have higher risk appetites and longer investment horizons.

Once you know the market capitalization and meaning of these three caps, you can proceed to invest in the right stocks. However, it’s crucial to remember that if the company’s market capitalisation changes, the stock’s designation as large-cap, mid-cap, or small cap might alter over time. Different financial organisations or experts may also use slightly different market capitalization cutoffs.

When considering investments, it’s critical to evaluate your risk tolerance, investment goals, and time horizon. Your portfolio’s diversification across different market cap categories might help you balance risk and maximise profits.

What are the differences between Large, Mid, and Small-cap stocks in India?

 The difference between these three stock market caps can be explained with different factors. Some of these are-

FactorsLarge Cap FundsMid-cap funds Small-cap funds
Risk ProfileCompared to the
rest, large-cap funds in India have a lower risk profile. They put their money into equities of the top 100 corporations or in large-cap ETFs.
Compared to large-cap equities, mid-caps are slightly riskier.
Compared to the other two, small-cap equities are the most risky assets. These equities offer excellent growth potential despite the risk.
Liquidity and Volatile NatureLarge-cap funds often have lower volatility unless there is news. They offer strong liquidity, stability, and returns.Mid-cap funds have a modest level of liquidity
and volatility.
Small-cap stocks are less liquid but more volatile in nature.
Return on InvestmentLarge-cap stocks have lower volatility and deliver a stable and consistent return. In the previous five years, they have delivered an average return of 7%.Over the previous five years, mid-caps gave an average return of about 10.28%. When compared to large-cap funds, they provide superior returns.Because of their high-risk, small-cap investments provide excellent returns. The average over the previous five years was 14.74%.
Growth PotentialThese businesses are well-known and more likely to produce steady returns. If you have a long-investment plan, it can give good growth.Moderate room for expansion.Viewed as having a higher potential for growth than large- and mid-cap funds. However, you must invest if you carry a good tolerance

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In conclusion

Market capitalisation is a crucial measure of the total market value of a company. For good investment diversification, you will require an understanding of market capitalisation. When the large-cap stocks in your portfolio are underperforming, mid-and small-cap stocks can gain ground.

However, large-cap stocks could stabilise your overall returns when mid or small-cap stocks are at their lows. If you understand this well, you can invest in the right stocks.

Equity and mutual fund investors should diversify their portfolios by making investments across a range of market capitalisation categories to gain in shifting market conditions.

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