Here’s a quick 101 of investing to explain what caps are and how they are categorised by SEBI. A quick ready for busy professionals to brush up on the basic’s without needing a finance degree.
Large-cap stocks are the top 100 companies based on the valuation of their size following market capitalization (read below). These are companies that are typically stable and industry leading for their sector due to the large size of their valuation which is generally above Rs20,000cr. Their low risk which means you may not get high growth compared to a mid or small-cap.
Mid-caps are companies ranking from 101st to 250th with valuations typically ranging Rs5,000-20,000cr. Higher risk than a large-cap but not as risky as a small-cap.
Small-caps are companies ranking from 251st onwards. Small-cap have much smaller value and are more volatile because they don’t have dominance in the market like a large cap. The opportunity for growth is high which makes them appealing for investors. And like most high growth opportunities, there is also high risk.
How caps are determined?
Caps are determined by Market Capitalization. Sound scary? It’s a simple math calculation where the overall objective is to help size a company for it to be assigned a cap category.
Market capitalization refers the total market value of a company’s outstanding shares. It is calculated by multiplying a company’s outstanding shares with the current market price of one share.
But what’s an outstanding share? It’s all shares currently owned by stockholders, company officials, and investors in the public domain.
Ready for the formula?
Market Capitalization = (Total no of outstanding share) * (Price of one share)
Let’s add some numbers for context.
Total number of outstanding shares= 50,00,000
Current price of 1 share= Rs 50
Market capitalization = 50,00,000* 50 = Rs 25,00,00,000
The market capitalization of company A is Rs 25 Crores making it a large-cap.
See? Not so tricky after all.