Share Market: Difference between Large, Medium, and Small-Cap
Beginners will always have questions regarding which stocks to invest in. At times, such questions can confuse and trouble even seasoned investors! Stock market investors should have adequate knowledge, for identifying which stocks are suitable for their investment strategy. If you don’t have a clear idea regarding the stocks you should put your money in, you will suffer from losses. There is always an inherent risk in the share market and it varies from one stock to the other.
On the basis of their market capitalization, stocks are classified into large-cap, mid-cap, and small-cap stocks. The classification helps investors to make wise investment decisions. This article will help in understanding the differences between large-cap, mid-cap, and small-cap stocks.
Market capitalization helps in measuring the estimated valuation of a company. It is calculated by multiplying the total number of outstanding shares of a particular company in the market with the current price of each of its shares.
Let’s study market capitalization with the help of an example.
Given ABC company has 10,000 outstanding shares in the market and each of its shares is priced at Rs 20. Then, the market capitalization of the ABC company is the product of:
Outstanding shares x Price per share
I.e.; 10,000 x 20 = Rs 2,00,000
Hence, the market capitalization of the ABC is Rs 2,00,000.
Companies which are traded on the stock exchanges are basically classified into three broad categories: large-cap, mid-cap, and small-cap.
Businesses which are well-established and have a notable market share are known as large-cap companies. These companies have market caps of Rs 20,000 crore or more. They dominate the industry and are usually very stable. These companies tend to hold themselves well in times of recession or during other negative events. They will have an experience of over decades and will hold good reputations in the market. Investing in large-cap stocks involves lesser risk. They are less volatile when compared to mid-cap and small-cap stocks. Lower-volatility makes large-cap stocks less risky.
Companies whose market cap is above Rs 5,000 crore but less than Rs 20,000 crore are known as mid-cap companies. They tend to be more volatile. Mid-cap companies have the capacity to turn into large-cap companies in the long run. The companies display high potential attracting investors towards such companies.
Metropolis Healthcare, Castrol India, and LIC Housing Finance are a few examples of mid-cap companies.
Companies which have market capitalization of less than Rs 5,000 crore are known as small-cap companies. The companies tend to be relatively smaller in size and will have adequate growth potential. However, the low probability of these companies being successful over the years, makes investing in them a risky affair. The stocks of such companies tend to be volatile in nature. Small-cap companies usually have a long history of underperformance. But it often happens that, as an economy emerges out of a recession, small-cap stocks will turn out to be outperformers.
Prominent small-cap companies listed with the stock exchanges of India include Hindustan Zinc, DB Corp and Hathway Cable.
Company type and stature
Large-cap companies are well-established in the equity market. They rank among the top 100 companies in the nation.Mid-cap companies sit somewhere between large-cap and small-cap companies. They are compact and are among the top 100-250 companies in the country. Meanwhile, small-cap companies are smaller in size and have the potential to grow rapidly.
Large-cap companies tend to have a market cap of Rs 20,000 crore or more. On the other hand, the market cap of mid-companies lies somewhere between Rs 5,000 crore and less than Rs 20,000 crore. Small-cap companies will have a market cap of below Rs 5,000 crore.
Investment risk has a close relation to volatility. If the price of a stock continues to be stable even in turbulent markets, the stock has low volatility. Stocks of large-cap companies will be less volatile, their prices remain stable even amid turbulence. It makes them relatively low-risk investment options. Mid-cap stocks are usually slightly more volatile and involve more risk. Small-cap companies are highly volatile and their prices swing considerably, increasing the risk for investors.
Large-cap stocks have a lower growth potential when compared to that of mid- and small-cap stocks. In case you have a longer investment horizon, then large-cap stocks are a stable investment option. Large-caps are well suited for investors with low risk appetites. Meanwhile, people with moderate risk appetite, could look into mid-caps, as they have a slightly better potential for growth. Small-cap stocks have the highest growth potential, but only people with high tolerance for risk should invest in them.
‘Liquidity’ refers to the fact that investors can buy or sell large-cap shares quickly and easily without any effect on the share price. Since there is a high demand for large-cap shares in the stock market, they tend to have higher liquidity. Mid-cap and small-cap companies have lower and least liquidity respectively. As a result, squaring off positions becomes more difficult.
Read more:Binomial Nomenclature
Check your knowledge
Answer) Large-cap, mid-cap, and small-cap stocks.
Answer) Outstanding shares x Price per share.
Answer) The market cap of mid-companies lies somewhere between Rs 5,000 crore and less than Rs 20,000 crore.