Market investors must have sufficient knowledge to determine which stock should be the right choice
When first-time investors enter the stock market, they often have questions about which stocks to invest in. Such questions can overwhelm even a seasoned investor. Stock market investors must have sufficient knowledge to determine which stocks should be the right choice as part of their investment strategy. If you have no clue about which stocks you should put money in, you could face losses. The share market involves inherent risk and this risk varies from one stock to another.
Stocks in the share market are often classified based on their market capitalisation (or market cap) as large-cap, mid-cap, and small-cap stocks. This categorisation helps investors to make informed investment decisions. Here we will help you to understand the differences between large-cap, mid-cap, and small-cap stocks.
To begin with let us understand the concept of market capitalisation and its different categories in detail.
Market Capitalisation: Meaning and Categories
Market capitalisation refers to the total number of outstanding shares of a company in the market multiplied by the current price of each share. It is a measure of the estimated valuation of a company.
To make things simpler, let us consider the meaning of market capitalisation with the help of an example. Suppose that ABC Company Ltd has 20,000 outstanding shares in the market and each share of ABC Company is priced at Rs 20. Then, the market capitalisation of ABC Company will be calculated as follows:
Outstanding shares x price per share, i.e., 20,000 x 20 = Rs 4,00,000. Therefore, the market capitalisation of ABC Company is Rs 4,00,000.
The companies that are traded on the stock exchanges can be categorised into three broad categories: large-cap, mid-cap, and small-cap.
What are Large-Cap Stocks?
Large-cap companies are businesses that are well-established and have a significant market share. Large-cap companies have market caps of Rs 20,000 crore or more. These companies dominate the industry and are very stable. They hold themselves well in times of recession or during any other negative event. Besides, they will usually have been functioning for decades and have good reputations. If you want to invest in a company’s stocks by taking less risk, then large-cap stocks are a good option. These stocks are less volatile in comparison to mid-cap and small-cap stocks. The lower volatility makes them less risky.
Reliance Industries Ltd (RIL), Tata Steel and Infosys Technologies are examples of some large-cap market companies that are listed on the stock exchanges of India. Their strong foothold in the market and consistent good performance makes them good choices for long-term investors.
What are Mid-Cap Stocks?
Mid-cap companies are companies whose market cap is above Rs 5,000 crore but less than Rs 20,000 crore. Investing in these companies can be riskier than investing in large-cap market companies. This is because mid-caps tend to be more volatile. On the other hand, mid-cap companies also have the ability to turn into large-cap companies in the long run. These companies offer a higher growth potential than the one offered by the large-cap stocks, and hence more investors are attracted to investing in such companies.
Metropolis Healthcare, Castrol India, and LIC Housing Finance are some examples of mid-cap companies that are listed on the stock exchanges of India.
What are Small-Cap Stocks?
Small-cap companies are those that have a market capitalisation of less than Rs 5,000 Crore. These companies are relatively smaller in size and have significant growth potential. What makes them risky is the low probability that they will be successful over time. This makes the stocks of such companies’ volatile in nature. Small-cap companies have a long history of underperformance but when an economy is emerging out of a recession, small-cap stocks often prove to be outperformers.
Hindustan Zinc, DB Corp, KNR Constructions, and Hath-way Cable are some examples of small-cap market companies that are listed on the stock exchanges of India.