Differences between Large Cap, Mid Cap and Small Cap Stocks
NOTE:- Here, the term ‘cap’ simply refers to the ‘market capitalisation’ of the stock.
Understanding ‘Market Capitalisation’
There are three main classifications when it comes to stocks –
Large Cap stocks
Mid Cap stocks and
Small Cap stocks
What is market Capitalisation?
It is the value of the stock that you arrive at by multiplying the stock price by the company’s outstanding number of equity shares.
Market Capitalisation = Current Stock Price x Number of Shares outstanding
For a better understanding, let us see an example:
Company ABC has 1,00,00,000 shares outstanding and its current share price is Rs 300. Based on the above formula, we can calculate that Company ABC’s market capitalisation is Rs 300 crores (1,00,00,000 shares x Rs 300 per share.= Rs 300 crores)
Thus, the Large-cap companies, Mid-cap companies and Small-cap companies contribute 80%, 15% and 5% of the total Market Capitalization of the market respectively.
Generally, the absolute market capitalisations of the respective classes are as under:
The main differences among these categories are as follow:
Large cap stocks according to the BSE- SENSEX AND BSE-100 INDEX
As we mentioned above, the first category based on market capitalisation is that of ‘large cap stocks’.
One can look at the BSE-Sensex or BSE-100 Index as a reference point for large cap stocks. Market capitalisation for stocks in the BSE-100 Index, for instance, ranges from Rs 20,000 crores to Rs 3,50,000 crores
These are stocks of usually large and well-established companies that have a strong market presence and are generally considered as safe investments. One important fact about large caps is that information regarding these companies is readily available in newspapers and magazines. Most of the large cap companies have good disclosures and therefore there is no dearth of information for an investor looking into them.
Large companies such as Infosys, TCS, and Wipro are classified as large cap stocks. These companies have been around in the industry long enough and have firmly established themselves as leading players. Their stocks are publicly traded and have large market capitalisations.
Mid cap stocks
Mid-caps lie between large cap stocks and small cap stocks. Mid cap stocks are those that generally have a market capitalisation within the range of Rs 5,000 crores and Rs 20,000 crores . 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. They rank between the two extremes on all the important parameters like size, revenues, employee and client base.
When one invests in mid-caps for the long term, he may be investing in companies that could become tomorrow’s runaway success stories. Generally speaking, mid cap stocks as an investment can bring you higher returns in 3 to 5 years as opposed to their big brother large cap stocks that can bring you moderate (yet safer) returns during this time frame.
Small cap stocks
Lying at the lowest end of market capitalisation, Small cap stocks are generally viewed under the misconception of being hazardous or ‘quick rich’ stocks. However, both these labels are untrue.
Small cap companies have smaller revenue and client bases, and usually include the start-ups or companies in the early stage of development. Small cap stocks are potentially big gainers as they are yet to be discovered within the sector and can show growth potential in large numbers once unfurled in the market. However, as these enterprises are small ventures, these should be researched properly. This is considering that a lot of small companies do not have the financial strength to survive bad times and some of them might be mismanaged businesses run by greedy promoters. Hence it is essential, especially in the case of small caps investments that one does a thorough research regarding the promoters’ credentials, management strength and track record, and long and short term growth plans of the company before investing.
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Sources : stockshastra.moneyworks4me.com
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