Looking through stock market investments, we often come across the terms large cap, mid cap and small cap. What do these mean?
To begin with, these emerge from the concept of market capitalization of a company, that is the total number of outstanding shares in the market multiplied by the current price per share.
For instance, if a company has 50,000 outstanding shares in the market, each priced at Rs 20, then its market capitalization will be outstanding shares * price per share, or 50,000* Rs 20 = Rs 10,00,000 IThis gives you an estimated value of the company.
Let’s look at how companies are categorized in accordance with this:
1. Large cap stocks: As the name suggests, these are stocks of large companies, the well-established ones that have been around for years and have a strong market presence. These are the first class in market capitalization, and includes companies with market cap above Rs 20,000 cr. Think TCS, Reliance, Infosys, Hindustan Unilever. Because of the longevity and expanse of their operation, these stocks are considered low risk, and information on such stocks and companies is widely available.
2. Mid cap stocks: Mid cap companies are the sweet spot between large cap and small cap companies, with market cap between Rs 5,000 – Rs 20,000 cr. Mid cap stocks can surprise anytime and channel growth, thereby giving higher returns in the mid-term investment horizon.
3. Small-cap stocks: Small-cap stocks are at the other end – these are start-ups or companies in their development stage. For investors with moderate to high-risk appetite, this is appealing because they want to bet on the potential of a company to see if it grows into something huge – these remain a highly risky investment option.
Additionally, it is important to know that in accordance with a Securities and Exchange Board of India (SEBI) circular, in order to ensure uniformity in respect of the investment universe for equity schemes, it has been decided to define large cap, mid cap and small cap as follows:
- Large Cap: 1st-100th company in terms of full market capitalization
- Mid Cap: 101st-250th company in terms of full market capitalization
- Small Cap: 251st company onwards in terms of full market capitalization
Remember that the key to optimum investment is diversification in moderation – don’t park all your funds in one sector or companies all belonging to the same capitalization category.
If the jargons and mechanics of the financial market are overwhelming for you, you are not alone. But simultaneously we would all like to see our money grow! Therefore, mutual funds investments are one of the best options for people who do not have the expertise to invest in the market. A mutual fund is a professionally managed financial vehicle that pools money from investors, who are then the unit holders under the scheme, to invest in stocks, bonds, debt instruments, money market instruments and other assets. Your goal, investment horizon, and risk profile would determine the choice of your schemes, which are divided broadly as equity, debt or hybrid mutual funds.
The small cap vs mid cap vs large cap differentiation becomes pivotal when you are choosing to invest in mutual funds that predominantly invest into equity shares, that is, at least 65%.
Equity mutual funds carry a higher risk because of the vagaries of the stock market performance which in turn determines their movement and growth. The risk is straightforward: if the market falls, a loss of capital is possible; if the market is booming, it can bring unfettered returns. If you choose an income scheme, dividend income may be disbursed. Under a growth plan, the same may be reinvested in the company with the goal of even larger wealth creation with mutual funds investments.
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