If you’re just getting into the world of stock trading, there might be many terms and terminologies that you may not be aware of. However, knowing what they are before getting to stock trading is very important since it can lead you to make better investment decisions. And so, in this article, we’re going to take a look at three terms - small cap, mid cap, and large cap. That’s not all. We’ll also take a look at a few differences between them. But before all that, let’s first take a look at what market cap is.
Also known as market capitalization, market cap is the term that investors use to denote the total market value of all of the shares held by shareholders of a company.
To calculate the market capitalization of a company, all that you have to do is multiply the total number of shares held by its shareholders with the current market value of the stock. Here’s a quick look at the formula.
Market Capitalization = Total number of outstanding shares x Current market price
For instance, if a company has 20 lakh outstanding shares and that the price of the stock is currently trading at Rs. 825 per share, then the market cap for the stock would be as follows.
Market Cap = 20 lakh shares x Rs. 825 = Rs. 165 crores
- What is small cap, mid cap, and large cap?
Now that you’ve seen what market cap is, let’s take a look at these three terms and try to understand what they are.
Firstly, these three terms are widely used to classify the companies listed on the stock market. In fact, the stock exchanges formally rank companies based on their market capitalization. And based on the market cap, the company is either categorized under small cap, mid cap, or large cap respectively.
The first 100 companies ranked according to their market capitalization by the stock exchanges are known as large cap companies. These stocks have a market cap of more than Rs. 20,000.
The companies with rankings from 101 to 250 are known as mid cap companies. The market capitalization of these companies tend to be between Rs. 5,000 and Rs. 20,000 crores.
And finally, the companies that are ranked 251 and below are known as small cap companies. The market capitalization of small cap stocks tend to be less than Rs. 5,000 crores.
- What is the difference between small cap, mid cap, and large cap stocks?
Market capitalization is not the only difference between these three stocks. Here’s a more in depth look at the differences.
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Large cap
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Mid cap
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Small cap
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Considered to be of low risk
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Slightly more riskier
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Very risky
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Enjoys high liquidity and low volatility
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Moderately volatile and liquid
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Characterized by low liquidity but are high volatile
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Tends to generate stable returns with low growth potential
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The potential for growth is moderate to high
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The potential for growth is very high
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These stocks are perfect for conservative investors.
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These stocks are ideal for investors with moderate risk tolerance.
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These stocks are the right option for aggressive investors.
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Conclusion
Hope you’re now aware of these terms and the differences between them. If you’re just starting out on stock trading, it is a good idea to just stick to large cap stocks for now. This is due to the relatively low amounts of risk that they come with. Also, since they’re very liquid, you can buy and sell them quite easily as well. And once you’ve gained enough experience, you can then choose to branch out to mid cap and then finally to small cap stocks.
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