Market Capitalisation Explained

We all know that there are different categories of stocks like large caps, mid caps, small caps and micro caps. When you analyze a company, we should be clear on which category the stock falls. This is highly important as the risk associated with a stock mainly depends on which category it belongs to. Normally large caps are low return, low risk stocks as the growth rate would be minimal but consistent. Small caps and micro caps are high return, high risk stocks as they can deliver high growth or a total collapse.

Why We Should Understand Market Capitalization
We might have heard the word "large cap" plenty of times. But what does this "cap" mean? The "cap" part is short term for capitalization, which is a measure by which we can measure the size of a company. A common misconception of retail investors is that the higher the stock price, the larger the company.

Stock price may misrepresent a company's actual worth. If we compared the two companies by simply looking at their stock prices only, we would not be comparing their true values, which are affected by the number of outstanding shares each company has. Say for example, the stock price of Maruthi Suzuki is Rs. 3946 and that of ITC is Rs.324 That does not mean that Maruthi Suzuki more valued than ITC. Infact, ITC is almost double in market value compared to Maruthi Suzuki

What is Market Capitalization and how it is calculated
Market capitalization is the total market value of the shares outstanding of a publicly traded company. it is equal to the multiplied value of share price and the number of shares outstanding. For example, consider company A has 1000 shares and the stock price is Rs.20. Here the Market Capitalization is the company is 1000*20 = Rs.2000

Market Capitalization Formula 
MC = N \P, where MC is the market capitalization, N is the number of shares outstanding, and P is the current price per share.

Different Types of Market Capitalization in Indian Scenario
Below the widely accepted standards for each Market Capitalization

• Large Cap Stocks
• Mid Cap Stocks
• Small Cap Stocks
• Micro Cap Stocks

What are Large Cap Stocks in Indian Market
BSE-Sensex/BSE-100/Nifty 50/Nifty next 50 Indexes are reference points for large cap stocks. Market capitalisation for stocks in the BSE-100 Index, for instance, ranges from Rs 200 bn to Rs 4300 bn. These are stocks of usually large and well-established companies that have a strong market presence for a long time and are generally considered as safe investments. Eg: TCs, Infosys, State Bank of India.

What are Mid Cap Stocks in Indian Market
Mid caps companies lie between large cap stocks and small cap stocks. Mid cap stocks generally have a market capitalisation within the range of Rs 50 bn and Rs 200 bn. These represent mid-sized companies that are relatively more risky than large cap as investment options yet, they are not considered as risky as small cap companies. Nifty Midcap 100 Index can be considered as reference points for mid cap stocks. Eg: Apollo Hospital, Britannia, MRF.

What are Small Cap Stocks in Indian Market
Small cap stocks generally have a market capitalisation within the range of Rs 1 bn and Rs 50 bn. These represent small-sized companies that are relatively more risky than mid cap as investment options. But there can be true multibaggers in this segment as well. Investors have to carefully study before investing in these stocks. Nifty Smallcap 100 Index can be considered as reference points for small cap stocks. Eg: Aban Offshore, Bajaj Hind, Ceat.

What are Micro Cap Stocks in Indian Market
Micro cap stocks generally have a market capitalisation below of Rs 1 bn. These represent very small-sized companies that carry high risk reward ratio. Investors have to carefully study before investing in these stocks. Micro caps and Small caps can be real wealth creators. For example Havells India Ltd was trading at Rs 7 in 2003. In 2013 the stock was trading at Rs. 665. So in just 10 years, the stock has given a return of 8915%!!!

Top 10 Indian Companies by Market Capitalization

Market Capitalisation as on Feb 02 2016

* 1 Billion = 100 Crores