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Market Cap: Definition, Types and Importance of Market Cap          

Market Cap: Definition, Types and Importance of Market Cap for Stock Traders

Market Cap: Definition, Types and Importance of Market Cap for Stock Traders

The Market cap (market capitalization) is one way of determining the size of a firm.  Market cap is the entire value of all of the company’s shares of stock that are currently in circulation, which includes both publicly traded shares and restricted shares that are owned by corporate officials and other insiders. 

The size of a firm’s market value may also serve as an approximate indicator of the stability of the company. Firms with a large market capitalization are often less sensitive to the ups and downs of the market than companies with a mid-capitalization, which in turn are typically less prone to volatility than companies with a small market capitalization. 

This is due, in part, to the fact that bigger organisations often have more financial reserves than smaller ones, and as a result, they are typically able to more readily absorb losses and swiftly recover from a poor year.

On the other hand, during periods of economic expansion, it’s possible that smaller businesses have a stronger capacity for experiencing rapid expansion than their bigger counterparts. Because of this, some people who are interested in dividends may use the market valuation of a company as a filter when searching for businesses that pay reliable dividends. 

What is Market Cap?

The market capitalisation of the company is the entire value of a publicly listed firm as determined by the value of all of its stocks in relation to the whole stock market. The term “market cap” is used to refer to market capitalization. 

How does Market Cap work
How does Market Cap work

The market capitalization of a corporation takes into account just its market worth and not its debts or liabilities. The market capitalization of a business is a valuable metric for evaluating its size, which tell an investor a great deal about the potential of a firm. 

The majority of investors choose to increase their portfolio’s level of diversification by purchasing stocks issued by large-cap, mid-cap, and small-cap businesses. This gives investors the opportunity to take some risks while also providing them with equities that are reliable even if they provide poor returns.

How does Market Cap work?

Market cap works by giving investors a scale to gauge the size of the company. The worth of a stock can frequently be determined by looking at its market capitalisation. It is a precise method that may be used to suggest the risks that are associated with a firm. Additionally, it is used to weigh the stocks of various companies for stock market indexes, with stocks of companies with bigger market capitalization being weighted more heavily.

This strategy is helpful for comparison because it enables investors to comprehend the magnitude of the potential rewards and losses associated with investing in other companies. It is essential for investors to keep a diversified portfolio, which may contain both safe investments in well-established businesses and riskier investments in startups.

Why is Market Cap Important for Stock Traders?

A high market cap is generally considered to indicate a more valuable and less risky company. This is because larger companies with high market caps tend to have a more established presence in their industry, more resources available to weather market downturns, and a more diverse range of revenue streams. Smaller companies with lower market caps may be more vulnerable to market volatility and may have less financial stability.

Investors often use market cap as a factor in deciding whether to invest in a particular stock, especially when considering the potential risks and rewards of different investment opportunities. For example, a large-cap company may be seen as a safer investment with less potential for high returns, while a small-cap company may be seen as a riskier investment with potentially higher rewards.

The market capitalization of a company is an important metric for stock traders to pay attention to because it serves as a measurement of the size of the firm and has the potential to influence the trading volume and liquidity of the stock. Companies that have a bigger market capitalization are typically more well-established and financially secure. Additionally, the stocks of these companies are likely to be more liquid and easier to trade.

On the other hand, the stocks of smaller companies that have lower market capitalisation are likely to be more risky and volatile, in addition to having lower trading volumes. In addition, market capitalization is frequently used as a method for classifying stocks into different size groups, such as large-cap, mid-cap, and small-cap, which can be helpful for investors who are wanting to diversify the holdings in their portfolio.

How to Calculate Market Cap?

You first need to determine the total number of outstanding shares and the current market price to determine market cap.

The outstanding shares are a measure of the total number of equity securities held by shareholders. This figure takes into account block shares held through investment firms as well as restricted stocks held by the company’s management. Additionally, unless a company provides employee stock options or conducts a second initial public offering, the number of shares that are actively traded will almost always remain the same. 

Calculate Market Cap
Calculate Market Cap

When a company’s stock was originally made accessible to the public, the company’s initial public offering (IPO) numbers are the best resource for determining the number of shares that are still outstanding. Take, as an illustration, the fact that a sizable technological company has just released an initial public offering (IPO) comprising 7.5 million shares. This value represents the total number of shares that are still outstanding, and it takes the place of this element in the formula.

Then, multiply the share price by the total number of shares that are currently outstanding.

That is, 

Market cap = Total number of outstanding shares * Share price

What is the Market Cap Formula?

The market cap formula is 

Market cap = Total number of outstanding shares * Share price

That means the current market cap of the company is Rs.100,000.

What is the Market Cap Rate?

Market cap rate is not a term related to stock market but properties. 

The market capitalization rate, which is often referred to as the “cap rate,” is a measurement of the connection between both the market value of a property and the income that the property is anticipated to create. Another name for the market capitalization rate is the “price-to-book ratio.” To determine it, divide the property’s annual net operational revenue by the property’s current market value.

This will give you the capitalization rate. When determining the probable return on investment of a real estate property, investors often use the capitalization rate (cap rate). Lenders also use it to figure out how much of a risk it is to provide a borrower with a loan for the purpose of purchasing a property.

What are the Types of Market Cap?

Companies are divided into three based on their market cap – large cap, small-cap and mid-cap.

Companies with a large market capitalization are those that have been around for a long time and hold a big portion of their target industry. Large-cap companies are those that have market capitalization that are at least 20,000 crore rupees high. 

Types of Market Cap
Types of Market Cap

Companies are considered to be mid-cap if their market capitalization is more than 5,000 crore but less than 20,000 crore rupees. 

Companies with a market capitalization that is less than Rs. 5,000 crores are considered to be small-cap companies.

  1. Large-cap

Large Cap is the term used to describe those companies that are listed by the Securities and Exchanges Board of India (SEBI) as being among the top 100 corporations in terms of their total market capitalization.  The phrase “large market capitalization” may be shortened to “large cap.” Large-cap firms in India are defined as those businesses that have a market valuation that is more than RS. 20,000 crores. 

Large market capitalization corporations are more reliable than other types of businesses. Nobody wants to put their money into a firm that will fail in a relatively short amount of time. Investors have more reason to believe that a large-cap firm would never go out of business because of the company’s larger market capitalization. As a result, it is safer to put money into such businesses.

Large-cap corporations are not immune to recessions.  During market downturn, not only does it affect companies with a little market capitalization, but it also affects corporations with a huge market capitalization. Nevertheless, large-cap enterprises have the ability and the capability to endure a downturn, and they will not be forced to cease operations as a result. 

Investors that have a more traditional outlook on the market might generate money via the purchase of the stocks of big-size companies. Large-cap firms do not experience rapid development. Hence, companies pay dividends since they are aware that the value of their stock would not rise at the same rate as the growth of the company.

Below is the list of top large-cap companies in India and their market cap.

Company nameMarket capitalization (as of Jan 5th, 2023)
RELIANCE INDUSTRIES LTD.1700503.24
TATA CONSULTANCY SERVICES LTD.1211274.07
HDFC Bank Ltd892113.56
INFOSYS LTD.620776.09
ICICI BANK LTD.613280.43
HINDUSTAN UNILEVER LTD.606499.99
STATE BANK OF INDIA540117.5
HOUSING DEVELOPMENT FINANCE CORP.LTD.479087.29
Life Insurance Corporation of India460428.21
BHARTI AIRTEL LTD.449061.2
ADANI ENTERPRISES LTD.436517.83
ITC LTD.413764.32
Adani Total Gas Ltd399670.98
Bajaj Finance Limited369303.67
  1. Mid-cap

Companies that fall into the midcap category have a valuation that is somewhere in the middle. To be more specific, companies that have a market valuation that is between 5,000 and 20,000 crores are considered to be in the mid-size group. They are neither as huge as large-cap firms nor as little as small-cap enterprises.

Investing in companies like these may provide a number of advantages, one of the most appealing of which is the possibility that the company’s earnings will grow in the future. It is anticipated that market share, value, and productivity would all exhibit an increased trend in addition to earnings. 

The position of these businesses in the market is seen as being unstable since they have just recently reached the development stage of their respective industries. Therefore, compared to large-cap stocks and small-cap stocks, mid-cap stocks are seen as riskier investments; yet, they are regarded as less dangerous investments than small-cap stocks. 

Financial experts recommend that those who want to reduce the likelihood of incurring losses should diversify the holdings in their portfolio. As a result, a buyer need to have an appropriate distribution of large-cap, mid-cap, and small-cap stocks in their portfolio.

Midcap companies are often less risky than smallcap companies, and as a result, they have a tendency to do rather well in terms of financing during challenging times. They provide higher returns than large-cap companies and have thus become quite enticing to stock purchasers as investment options due to this fact. 

Checking benchmark indexes such as the Nifty and the Sensex is a quick and easy method for locating stocks and firms with a midcap value. Companies ranked 101st through 250th on the list are considered to be midcap businesses.

Below are the list of important mid-cap companies and their market cap in India.

Name of the companyMarket cap (in crs)
Procter & Gamble Health Ltd6,679
Gillette India Ltd16,362
Aegis Logistics Ltd
 
12,031
Amara Raja Batteries Ltd
 
9,774
Bajaj Electricals Ltd
 
13,499
Balrampur Chini Mills Ltd
 
7,880
Century Textiles & Industries Ltd
 
7,969
BASF India Ltd
 
12,037
BEML Ltd
 
6,299
Blue Star Ltd
 
11,417
CESC Ltd
 
10,220
Chambal Fertilisers and Chemicals Ltd
 
13,173
Exide Industries Ltd
 
15,224
Mangalore Refinery And Petrochemicals Ltd
 
9,893
E.I.D. – Parry (India) Ltd
 
9,984
Esab India Ltd
 
6,415
EPL Ltd
 
5,258
Finolex Cables Ltd
 
8,349
Godfrey Phillips India Ltd
 
10,035
Godrej Industries Ltd
 
14,528
GHCL Ltd
 
5,059
HFCL Ltd
 
10,257
Ingersoll-Rand (India) Ltd
 
6,095
Kajaria Ceramics Ltd
 
18,576
Whirlpool Of India Ltd
 
19,094
Kirloskar Ferrous Industries Ltd
 
5,031
Lakshmi Machine Works Ltd
 
12,983
The Ramco Cements Ltd
 
16,725
Maharashtra Scooters Ltd
 
5,333
NCC Ltd
 
5,726
Piramal Enterprises Ltd
 
19,481
Raymond Ltd
 
9,716
Birla Corporation Ltd
 
7,649
Prism Johnson Ltd
 
5,605
  1. Small-cap

The shares of companies with a valuation of less than Rs. 500 crores each are referred to as having a “mall-cap” market capitalization. Small caps are new, fast-growing enterprises that have a primary emphasis on expansion potential but are also subject to a significant level of risk and volatility. You have the opportunity to compete with and maybe beat the performance of institutional investors, who often favour large-cap stocks.

The Securities and Exchange Board of India (SEBI) assigns each company a certain market capitalization, which is then used to classify the firms. Small-cap companies accounts for approximately 95% of all enterprises in the country. 

A company that is publicly traded and is listed on the stock market is said to have a market capitalization that is equal to the market value of the company. Companies that have modest sales and, as a result, a lower size of capital are included in the category of small-cap stocks. They often have a lower size of the staff as well, and their business management is not as solid as that of large or mid-cap companies.

However, both large and mid-cap enterprises started out as tiny businesses in the past and expanded their operations as their capitalization increased. Below is a list of some of the best small-cap stocks in India.

What does Market Cap mean in Stocks?

Market cap in stocks means the total value of a company based on its stock price. Market cap is derived by multiplying the number of outstanding shares with the current stock price. The market capitalisation of a company may be a helpful metric for investors to utilise when analysing the size of a company and determining whether or not it corresponds with their investing goals.

For instance, an investor who is looking for large, well-established companies to invest in might prefer to concentrate on stocks with high market caps, while an investor who is looking for smaller, up-and-coming companies to invest in might prefer to concentrate on stocks with lower market caps. Both types of investors are looking for the same thing, which is a return on their money.

Investors are able to observe which firms are the largest and most prominent in a certain industry, which makes market capitalization a useful metric to use when comparing companies operating in the same sector.

What does Low Market Cap mean in Stocks?

A low market cap company in India is one with a market capitalization of less than INR 500 crore . Small-cap and mid-cap companies often fall under the low market cap category in India. These companies may have higher growth potential compared to large-cap companies, but they may also be riskier and more volatile.

What does High Market Cap mean in Stocks?

A high market cap indicates that a company is larger in size and has a higher valuation. This may suggest that the company is more established, profitable, and less risky than a company with a lower market cap. Investors may consider high market cap companies as a safer investment, especially if they are looking for stable returns over a longer period of time

What is a Good Market Cap?

A good market cap typically refers to a large and well-established company with a market capitalization of over INR 10,000 crores or more. Companies with such high market caps are usually industry leaders, with a proven track record of stable earnings and strong fundamentals.

Is it better to have a Large Market Cap?

Yes, It is largely true that large-cap investments are regarded to be less risky than small-cap or mid-cap equities, and they may be a viable solution for risk-averse investors who are searching for stable long-term growth. This is because large-cap stocks tend to have a greater market capitalization than small-cap or mid-cap stocks.

Large-cap stocks are shares of stock held by large, well-established corporations that have high market capitalizations. These businesses are generally financially secure, with solid track records of income and earnings growth, and they frequently have a diverse range of services or products to offer their customers. 

Large-cap companies have a history of success and are in a strong financial position; as a result, the price volatility of their stocks is typically lower than that of stocks issued by smaller companies. This quality can make large-cap stocks an appealing option for investors who prefer to minimize their exposure to risk. In addition, large-cap stocks may provide investors with a lower potential return compared to small-cap or mid-cap stocks, which may provide investors with higher returns but also carry a higher level of risk. 

However, it is essential to keep in mind that even large-cap stocks are not risk-free investments. Investing in large-cap stocks is not a foolproof way to make money because their performance can be impacted by a variety of factors, including shifts in economic conditions, trends in specific industries, and other aspects of the market. Before deciding to put money into large-cap stocks, investors should conduct a thorough analysis of the potential downsides as well as the upsides, just as they would with any other type of investment.

Is Stock Price Affected by Market Cap?

No, market cap does not directly affect a company’s stock price. But Market cap is an important metric that is often used by investors to evaluate a company’s size and value. A company with a higher market cap typically has a larger, more established presence in the market, and may be viewed as a less risky investment compared to a smaller company with a lower market cap. 

What is Free Float Market Cap?

Free float market capitalization, also known as “free float capitalization,” is a measure of the total value of a company’s outstanding shares of stock that are available for trading by the general public. Understanding a company’s current value using only the Free Float Market Capitalization metric is an overly simplistic method.

Businesses typically give away a portion of their total share capital to individuals and organizations such as its founders, directors, and welfare trusts. These share capitals are not offered to the general public and they do not participate in the stock market’s trading activities. Free-float market capitalization refers to the amount of a company’s total share capital that is open to trading by the general public on a stock exchange. 

It is not the financial success of the company that drives the investments of the promoters and others who hold controlled shareholdings; rather, it is things like preserving control of the company. The free float market cap is used to discriminate between strategic shareholders (control shareholders) and public shareholders.

This is its primary function. The price of the stock and the public shareholders’ projections for the future growth of the company serves as the basis for their investment decisions.

What is the difference between Market Cap and Free Float Market Cap?

The main difference between a market cap and the free float market cap is the number of shares that is considered. Market cap considers the total outstanding shares a company has while free float market cap only takes into account certain shares held publicly.

Market cap includes all shares of stock, regardless of whether they are held by insiders or are available for trading by the general public. 

Free float market cap is calculated by multiplying the company’s stock price by the number of shares that are available for trading, rather than the total number of shares outstanding. This excludes shares that are held by insiders or are otherwise not available for trading by the general public.

Arjun
Arjun Remesh

Head of Content

Arjun is a seasoned stock market content expert with over 7 years of experience in stock market, technical & fundamental analysis. Since 2020, he has been a key contributor to Strike platform. Arjun is an active stock market investor with his in-depth stock market analysis knowledge. Arjun is also an certified stock market researcher from Indiacharts, mentored by Rohit Srivastava.

Shivam
Shivam Gaba

Reviewer of Content

Shivam is a stock market content expert with CFTe certification. He is been trading from last 8 years in indian stock market. He has a vast knowledge in technical analysis, financial market education, product management, risk assessment, derivatives trading & market Research. He won Zerodha 60-Day Challenge thrice in a row. He is being mentored by Rohit Srivastava, Indiacharts.

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