Difference Between Large-Cap and Small-Cap Stocks

Stocks are classified based on a company’s market capitalisation to help you understand a business’s size and position in the market. The three classifications are large-, mid-, and small-cap stocks. Large-cap and small-cap are two popular investment categories. 

By recognising the difference between them, you can identify the different profiles of companies that offer them and consider their potential for returns. This will allow you to align your investments with your risk tolerance and diversify your equity investment.

Market capitalisation, or market cap, is the total value of a company based on its current stock price and outstanding shares. It is calculated by multiplying the share price by the total number of shares issued by the company. 

Market cap helps categorise companies listed into different groups such as large-cap, mid-cap, and small-cap. These classifications are defined by the Securities and Exchange Board of India (SEBI) based on the ranking of companies, as detailed below.

This classification is reviewed periodically and serves as a standard for categorising investments and mutual fund schemes.

Large-cap stocks belong to well-established companies that are in the top 100 companies by market capitalisation in India. Their market cap is about ₹20,000 Crores or more. These firms have strong brand recognition, consistent revenues, and a proven performance record. They are also called ‘blue-chip’ stocks. 

These companies often operate in broad sectors like banking, energy, FMCG, and IT. They are considered stable and less volatile than mid or small-cap companies. As per SEBI regulations, large-cap mutual funds must invest at least 80% of their total assets in large-cap stocks (top 100 companies by market cap). 

A large-cap fund is an equity mutual fund that mainly invests in these stocks. Since individual stock performance may vary, the fund offers steadier returns with lower volatility.

The stock of small-cap companies is equities that fall in the list from the 251st rank, based on market capitalisation, i.e., less than ₹5,000 crores. In general, small-cap stocks are companies that are newer, less mature, and currently in the growth phase. 

Small-cap stocks often tap into potential growth from emerging sectors or niche markets. Small-cap funds may have greater relative growth potential than large-cap funds. They also, however, come with greater potential for volatility based on market sentiment and liquidity.

Here is a brief comparison of large-cap and small-cap stocks across various financial and operational parameters.

Market cap is influenced by various internal and external factors, such as:

• Stock Price Movement

A rising share price, acquisitions, and positive news can increase market cap, moving a company up in the rankings. 

• Equity Issuance or Buybacks

The changing number of outstanding shares can affect the calculation of the current market cap. 

• Corporate Performance

Revenue, profits, and margins impact investor perception and stock prices, leading to increased market capitalisation. 

• Sector Trends

A rise in technological advances or popular trends within an industry can affect the valuations of firms in the specific sector.

SEBI established a format for categorising companies according to market capitalisation. The Association of Mutual Funds in India (AMFI) defines large-cap, mid-cap and small-cap stocks by reviewing their market cap every six months. SEBI mandates that AMFI categorise companies based on a six-month average market capitalisation. 

It also directs AMFI to prepare this list by checking the market capitalisation as listed by the following stock exchanges:

• Bombay Stock Exchange

• National Stock Exchange

• Metropolitan Stock Exchange of India Limited

This list is then prepared in consultation with SEBI. The regulator’s goal is to offer a more accurate and stable measurement of listed companies and their stock and to improve regulatory clarity.

Market capitalisation reflects the size, state of growth, and financial position of a company. It helps to differentiate between large-cap and small-cap stocks when considering their:

• Characteristics, such as liquidity and volatility

• Prospects for long-term growth and profitability 

However, market cap alone is not the sole basis for evaluating any investment. It is one of several elements that help in understanding a company's profile, along with its financials, management, and sectoral context.

Large-cap and small-cap stocks serve different roles in the financial ecosystem. While large caps represent stability and scale, small caps may offer agility and potential upsides. Market capitalisation acts as a lens through which you can understand the relative size and nature of listed companies.

This content is for educational purpose only and the same should not be construed as investment advice. Bajaj Finserv Direct Limited shall not be liable or responsible for any investment decision that you may take based on this content.