Market Capitalization represents the aggregate value of a company. It is obtained by multiplying the number of shares outstanding by the current price per share.
For example, if XYZ company has 15,000,000 shares outstanding and a share price of Rs. 20 per share then the Market Capitalization will be Rs. 300,000,000 (15,000,000 x Rs. 20). Simply defined, Market Capitalization is the price at which you can buy all the outstanding shares of the Company.
The per-share price is virtually meaningless for those who follow the principles of value investing. The reason why they do not look at the per-share price is because it changes with the perception of the people and reflects what the market is willing to pay for a share at a given time. Nevertheless, this changing perception constantly keeps changing a company’s Market Capitalization.
Stocks are generally classified on the basis of Market Capitalization in India. Different fund houses and investment professionals adopt varying definitions to classify stocks on the basis of market capitalization such as Large Caps; Mid caps; and Small Caps. Some Analysts use different approach and add Micro and Mega Caps in their classification. In all approaches, market capitalization functions as an indicator of a company’s size.
For investors it is important to have some knowledge of how different classes behave. In general terms, different market caps (i.e. large, mid and small) carry varying degrees of risk and potential returns. Given below is a comparative account of mega-cap, large-cap, mid-cap and small-cap companies.
Our standard approach of classifying companies is given below:
I. Mega Cap – Companies with a market cap exceeding Rs. 20,000 Cr. Mega caps are usually blue chip stocks with strong brand recognition; excellent track records and a history of wealth creation, such as ITC, State bank of India, Coal India and others.
II. Large Cap – Companies with a market cap between Rs. 7,000 Cr. and Rs. 20,000 Cr. Large and well established companies with well known products fall into this category, such as Ashok Leyland, and others large-cap stocks.. Both mega and large cap stocks are considered to be relatively stable and secure investment options.
III. Mid Cap – Companies with a market cap between Rs. 500 Cr. and Rs. 7,000 Cr. Companies in this basket are in their developing or growth stage and their share price are more volatile than the large- and mega-cap companies. Mid caps represent a significant portion of growth stocks. Some of the companies might not be industry leaders, but they may well be on their way to becoming one.
IV. Small Cap –Companies with a market cap upto Rs. 500 Cr. Although their track records won’t be as lengthy as those of the mid to mega caps, small caps do present the possibility of greater capital appreciation – but at the cost of a higher degree of risk.
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Note: Companies can adjust their share price through changes in the capital structure (splits, rights issue, bonus issues), but the Market Capitalization remains the same because they increase the number of shares outstanding in relation to the change in the capital structure. Change in the capital structure, while affecting the stock price, does not affect the Market Capitalization of a company.