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Categories of Stocks and Market Capitalization

HomeCategories of Stocks and Market Capitalization
Classification of stocks in different groups is often confused with market capitalization. While stocks are classified in groups, it has little to do with market capitalization. It’s important that investors know about these concepts.

Categories of Stocks

Different categories of stocks in the Indian stock market:
 
‘A’, ‘B’,’T’, ‘S’, ‘TS’, and ‘Z’
 
Category A: Consists of around 200 companies which are selected according to market capitalization. BSE has set certain criterion for companies to be listed in this group, which are:
 
  1. The company must have been listed for a minimum of 3 months;
  2. The company must have traded for a minimum 98% of the trading days in the past 3 month;
  3. Minimum non-promoter holding of 10% as per the shareholding pattern of most recent quarter;
  4. To arrive at the final ranks, 75% and 25% weightage is given to ranking on 3 monthly average market capitalization and traded turnover respectively;
  5. Based on final rank, the list shall be screened for agreement and investigation. Based on this screening, the list of top 200 companies constitute group ‘A’.
 The group re-classification is reviewed twice in a year in February and August.
 
On inclusion of any new Company in group ‘A’ based on above criteria, the last company in the existing group ‘A’, based on its final rank calculated on data preceding three months is excluded.
 
Category G: includes government securities for retail investors.
 
Category F: comprises of Fixed Income Securities.
 
Category T: comprises of securities in the trade-to-trade basis as a surveillance measure.
 
Category TS: trade-to-trade basis as a surveillance measure.
 
Category S: securities for which trade is done through BOLT System.
 
Category Z: Includes companies that fail to comply with listing requirements, or failed to resolve investor complaints, or have not made the required arrangements with Central Depository Services (I) Ltd. (CDSL) and National Securities Depository Ltd. (NSDL).
 
Market Capitalization 
 
Most investors look at the size of a company (i.e. market capitalization) before deciding whether or not they are going to invest in it. In general terms lower the market capitalization, higher the returns from that particular investment.  Therefore before you invest in a particular company you should look at its market capitalization. 
 
If you are looking to make high returns and are willing to assume a certain degree of risk, you should be looking at midcap stocks. This does not mean that large cap stocks will not give you high returns. It is just the principle of risk-reward (i.e. higher risk you assume, higher reward potential). Midcap stocks are in their growing phase and if the business of the company does well, these stocks outperform the broader market. On the other hand if the business does not perform as expected, these stocks can underperform the broader markets. Large cap stocks on the other hand belong to companies, businesses of which has matured and is growing consistently, albeit at a slower pace. While midcap stocks offer higher returns, they have higher price volatility. 
 
The decision of whether to go for midcap stocks or large cap stocks entirely depends on your risk profile as also your expected rate of return. If you want stability then you should look to buy large cap stocks while if you are willing to take a little risk and want to earn higher returns, you should choose midcaps. Ideally, you should have a mix of both in a healthy portfolio. For novice investors it would be wise to start with safe large cap investments before they move on to investments in midcaps. This will help you learn how to invest and perfect your investment skills before you can finally move on to the riskier type of investments. Even so you need to have all the information that you can get if you wish to get the best out of your investments.
 

About the Author

Rajat Sharma pictureRajat Sharma is a well known stock market analyst and commentator. He has covered Indian markets for over a decade and is regarded for consistently identifying early stage investment opportunities. Attorney by qualification, Rajat has done extensive work for improving corporate governance and disclosure standards.