What is Market Capitalization? and its importance in stock market investments

If you are in the stock markets for the long time or new to stock markets you might have heard the word market  capitalization many times. It commonly referred to as "market cap". But, Have you ever tried to know about this more clearly. Now we do in this particular article.

    Market capitalization is nothing but a company's total valuation based on the current share price of the company and total number of shares of the company. To get market capitalization of any company we need to multiply the number of shares of the company with its current market price of company's share. For instance, a company named "abc" has 1000 outstanding shares, and a share current market price is 20rs, then the market capitalization of the company "abc" is 1000*20 = 20000rs. 

Formula for Market Capitalization:

Market capitalization = current market price of a share x # shares outstanding

Now, Let us try to find Market capitalization of a listed company.

Infosys: INFY(NSE and BSE Symbol)

Number of shares as on March 31, 2022 : 4,206,738,641

Market capitalization as on March 31, 2022 : 802,162 (Crores)

Classification of companies based on the market capitalization

In the stock market companies are typically divided according to market capitalization. The company with a market cap of Rs 20,000 crore or more are large cap stocks. The following companies are well-known large cap companies in Indian stock markets.

1. Reliance Industries Ltd. 

2. TCS

3. HDFC Bank

4. Infosys

5. Hindustan Uniliver Limited(HUL) and  more.

Company with a market cap between Rs 5000 crore and 20000 crore are mid cap stocks. 

1. IRCTC

2. Varun Beverages

3. Canara Bank

4. Mindtree

5. Manappuram Finance and more

Company with a market cap less than Rs 5000 crore market cap are small cap stocks.

1. Birlasoft

2. Tanla Platforms

3. Rain Industries

4. NALCO

5. IEX and more

Importance of Market capitalization in Investing

    Everyone who wants to to invest their hard earned money in stock markets should know that market has inherent risk, and this can erode our money. If we want to minimize the losses and improve the gains, we must invest wisely by taking many factors into consideration. Market capitalization is one of those factors.

Here, We will try to explain with an example. 

    A plywood sheet will break if a weight of 1000 kg is placed on it. But if the same 1000 kg is placed on top of 10 plywood sheets, the damage is comparatively low. Now imagine, if the number of sheets is increased to 100, a weight of 1000kg can not do any harm to stack of plywood sheets.

    Here, 100 Sheets of Plywood is like a large cap company. Just like plywood stack can withstand the weight of 1000 kg, large cap companies can also withstand the fluctuations or volatility in the stock markets.

Large cap Companies: 

    Large cap companies and the management have been in their business for many years. Therefore, the management of the company can keep the company stable even in the difficult times. As they have been functioning for years they got good foothold in the market. They also consistent in the business performance over the years. So All these reasons put together ended up in saying Large cap companies are safer for long term investments comparatively to Midcap and Small cap companies.

Midcap Companies:

     Midcap companies as the name suggests lie between the large cap and small cap companies in terms of market capitalization, size, revenue, manpower. Mid cap companies are risky for investment in comparison with large cap companies. But, their return potential is high as they heading towards the growth stage. Over the period of time they may turn into large cap companies under the intelligent management. 

    Mid-cap companies are preferable for investment than the large caps, if you can tolerate the risks involved with midcaps. Midcap companies gives good returns in the bull market conditions than large caps. They may decline in the same way in negative market conditions or in the bear markets. 

Small cap Companies:

Small cap companies are relatively smaller in size, market capitalization, revenues and manpower. These companies are very volatile in nature and possess more risk. But, as the midcap companies these companies gives nice returns on the invested amount in very positive market conditions. 

Disclaimer : All the information provided in this article is purely for education purpose only, and it is not an investment advise. Please consult your personal financial adviser before taking any investment decisions.