Summary
The total market value of outstanding shares of a company is known as market capitalisation. It should not be confused with company value.
Investors can use market capitalisation to diversify their portfolio, mitigate risk, and compare and choose a suitable company for investing.
What Is Market Cap in the Stock Market?
A market capitalization is the total market value of the company’s outstanding shares. It explains the actual worth of the company’s shares based on the current market price. However, it is not the company’s overall worth. After determining market capitalisation, companies can be categorised as large-cap, small-cap, or mid-cap.
How Is Market Capitalisation Calculated?
The calculation of market capitalisation is simple. It includes multiplying a company’s outstanding shares by its current market value.
Market Capitalisation = Total outstanding shares × current market price
The outstanding shares are the total shares of the company, including institutional investors and company promoters.
Types of Market Capitalisation in the Stock Market
The companies can be divided into three categories based on their market capitalisation.
- Large-Cap: These are popular and well-established companies that have a market capitalisation of over ₹20,000 crore. They are the top 100 companies on the stock exchange. Large-cap companies include a low degree of risk and a stable growth potential.
- Mid-Cap: These are companies that have a market capitalisation of less than ₹20,000 crore but more than ₹5,000 crore. These companies are ranked between the 101st and 250th companies in the market. They include higher growth potential.
- Small-Cap: These companies are the new and small companies with a market capitalisation of less than ₹5,000 crore. They are ranked from 251st in the stock market. These companies are highly volatile but include high growth potential.
| Basis | Large-Cap | Mid-Cap | Small-Cap |
| Market Value Range | Over ₹20,000 crore | Less than ₹20,000 crore but more than ₹5,000 crore | Less then ₹5,000 crore |
| Risk Level | Low risk | Medium risk | High risk |
| Growth Potential | Slower and steady growth | Moderate growth | High growth potential |
| Market Rank | Top 100 companies | Between top 101 and 250 companies | From 251 and more |
Why Market Cap Matters for Investors and Traders
The market capitalisation helps to measure a company’s growth potential and the risk involved to make appropriate strategies and enhance investment decisions.
- Risk and Growth Evaluation: It provides important insight into the amount of risk associated with the shares. It says if the company’s shares include high, moderate, or low risk. It also determines their growth potential. Companies that qualify as small-cap have the scope to grow in the future, whereas a large-cap company has already reached its peak, so less scope for growth.
- Portfolio Planning: It allows investors to spread their investment across different companies based on their market capitalisation. They can choose large-cap for stability, mid-cap for growth, and small-cap for a high return on investment.
- Trading Liquidity and Insights: They also provide insights into the trading activities. The large-caps are steady. Therefore, a high rate of trading takes place in large-cap companies, including a huge amount of shares bought and sold frequently. However, small-caps are quite volatile. Therefore, a small change in the market trends can bring big shifts in their share prices, making them least preferable for trading.
Market Cap vs Share Price vs Company Value
Although market capitalisation, share price, and company value are related, they are not the same.
| Basis | Market Cap | Share Price | Company Value |
| Meaning | Total market worth of company shares | Cost of a single unit of stock | Total worth of the entire company |
| Formula | Share price × Total shares | Measured by market demand and supply | Market Cap ÷ Debt – cash and cash equivalents |
| Use | Company’s position in the stock market | Price for one share | Cost to acquire the entire company |
Real-Life Examples and Practical Use Cases
Suppose an investor wants to maintain a stable portfolio that provides stability, growth, and high returns. He researched the market and decided to invest in all three categories of market capitalisation, i.e., large-cap, mid-cap, and small-cap. After proper research, the investor selected 3 companies, including TATA Consultancy, PB Fintech, and a small business.
The investor spread his investment across the selected companies, which helped him maintain stability by investing in TCS, a large-cap, and in PB Fintech, a mid-cap firm, for the scope of growth. And because of the changing market conditions, he was able to earn significant returns from the small-cap company.
Common Mistakes Investors Make While Using Market Cap
Although market capitalisation is an important metric to measure the total value of a company’s entire shares, investors usually make certain mistakes while relying on it.
- Misunderstanding size and value: Many investors assume that the larger the share price, the bigger the company. Only the share price cannot determine the size of the company.
- Not considering company fundamentals: Most investors ignore the importance of company fundamentals and invest without acquiring proper knowledge about the company’s profitability, financial position, and management.
- Assuming large-caps are safe: Although large-caps provide more stability than the rest, they do not guarantee complete reliability for steady and stable returns.
- Ignoring diversification: Many investors tend to invest entirely within the same market capitalisation category without considering diversification. This increases concentration risk and creates an imbalance between risk and returns.
How to Use Market Cap in Your Investment Strategy?
Investors usually use market capitalisation as a strategy for efficient investment planning.
- Align with your objective and risk: Investors create their investment strategies based on their risk appetite and objectives. Therefore, they can use market capitalisation as a tool to measure the risk involved in different businesses, and accordingly invest in suitable shares.
- Diversification: Investors can mitigate concentration risk and maintain a diversified portfolio based on market capitalisation. This will help them protect the rest of the portfolio when one sector performs poorly.
- Analysing company fundamentals: Market capitalisation along with company fundamentals will provide a clearer overview of the company’s performance.
Final Thoughts
Market capitalisation is the overall value of a company’s total outstanding shares. It is used to identify the size and position of a company in the stock exchanges. It helps to identify suitable companies for investing that align with investors’ goals and risk tolerance.
Market Capitalisation can also be used as an investing strategy. It allows them to diversify and maintain a balanced portfolio, spread their risk, and align with company fundamentals to identify appropriate companies for investing.
FAQs
Market capitalisation is calculated by multiplying a company’s current share price by its total outstanding shares.
It helps investors understand a company’s size, assess its risk profile, compare businesses, and build a diversified investment portfolio.
There is no single best category. Large-cap stocks generally offer greater stability, mid-cap stocks balance growth and risk, while small-cap stocks have higher growth potential but also higher volatility. The right choice depends on your investment goals and risk tolerance.
No. A higher share price does not necessarily indicate a larger company. Market capitalisation, which considers both the share price and the number of outstanding shares, is a more accurate measure of company size.
Yes. Market capitalisation changes whenever a company’s share price fluctuates or when the number of outstanding shares changes due to events such as share buybacks, new share issuances, or stock splits.
Yes, market capitalisation can be helpful for beginners to identify the relative size of companies, evaluate investment risk, and choose stocks or mutual funds that match their financial objectives.
Market capitalisation can help investors spread their investments across large-cap, mid-cap, and small-cap stocks to reduce concentration risk, improve growth potential, and maintain a balanced portfolio.
