What is Market Capitalization of a Company: The term “Market Capitalization” is often referred to as ‘Market Cap’. It indicates the aggregate valuation of stocks. Market cap guide investors to make a quick decision about companies’ size and values. It is calculated by multiplying the current market price of 1 share with the total number of outstanding share. Investors can have a quick idea about company’s valuation from this without going into too many details of a company’s balance sheet, equity, debt etc. So, what is the market capitalization of a company is a quite vital concept.
The formula of market capitalization is quite simple,
The market price of 1 share (multiply by) the number of shares in issue.
Market cap is generally classified into three categories, large cap, mid cap and small cap. Companies with more than 75,000 cr. market cap belongs to Large-cap. Example of large cap companies are State Bank of India, Reliance Industries, Coal India etc. Companies with 13,000 to 75,000 cr market cap belongs to Mid-cap and last of all company’s with less than 13,000 cr are Small-cap companies. A chart is listed below:
In the market, there are top 100 companies with the valuation of more than 75 cr. Large-cap companies lead the market and they form the major stock indices. As the companies run the market for a long time, they have a very strong presence in the market. But there is a twist here. Investing in large cap companies doesn’t always bring a huge return in a short time span. Over the long run, there is some possibility of an increase in share value. As they have less room to grow, it needs time to grow and make a huge profit in a short period of time.
In mid-cap, there are top 101 to 250 companies. with the valuation of 13,000 to 75,000 cr. market cap. The growth rate is higher than large-cap companies but there are negative aspects too. Mid-cap companies carry a higher risk than large-cap because they are not as established as large cap. the possibility of a huge return is higher than the top 100 large caps.
In small-cap, the limit of market capitalization is less than 13,000 cr. Beyond top 250 companies, all are belong to small-cap. As the companies are much younger in age, they carry the highest risk in the matter of investment. With this negative point, there is a positive one too. As there is very much possibility of expanding, there is a huge possibility of the maximum return in a short period of time.
Some Misconception about market capitalization
There is some misconception regarding market capitalization. Some investors think that the higher the share price, bigger the company. This conception is absolutely wrong. In order to discuss the topic, we put a chart of top 18 companies belongs to large cap.
So, this chart is consist of top 18 companies from the large cap. Here look at the 4th company from the above ITC. Its last share price was 280.25 and market cap is 342,025.36. On the other hand 7th company, Maruti Suzuki’s last share price was 8,710.60 and market cap is 263,129.86. Therefore, it is clear that one cannot decide companies rank and valuation by its share price.
What is Market Capitalization of a Company – A Conclusion:
Here are some brief points of market capitalization as follows:
- It indicates the aggregated value of a company
- Each and every company in the market belongs to these 3 categories. Large-cap, Mid-cap, and Small-cap
- One cannot decide a company’s rank and value by share price.
Finally, It can be said that market cap is a guide or indicator for investors. It indicates the overall valuation of a company. So the market cap is definitely one of the most vital concepts that beginners should learn.
Categories: Stock Market Basics