As a budding trader or investor, one of the first things that you need to know is how to classify stocks. Once you know how to classify stocks, you also know which stock is suitable for you when you trade or invest. Different types of stocks behave in different ways, so it’s important to identify each stock when you do your analysis.
In this guide, we’ll take you through the most common way in which stocks are classified, which is by market capitalisation.
Market capitalisation is commonly referred to as “market cap”, is a way of measuring the total value of a company.
It is determined by multiplying the current market price of a single share of a company’s stock by the total number of outstanding shares of that company.
Market capitalisation, essentially, signifies the collective market worth of all outstanding shares issued by a company.
Some of the main factors that determine the market cap of a company are: earnings, industry trends, market sentiments, and company news.
Why is market cap important?
For stock traders, having knowledge about market capitalisation is crucial because it can offer valuable information about the company’s size, the potential for growth, and the level of risk.
- Size – Larger companies tend to have more stable stock prices with lower volatility than smaller ones. This is because larger companies have more resources and are often better diversified, which helps to reduce the impact of negative market events.
- Growth potential – Smaller companies with lower market capitalisation may have more room to grow and increase their market share, thus having greater growth potential compared to larger companies.
- Level of risk – Smaller companies with lower market capitalisation are typically riskier investments because they are more susceptible to market fluctuations, while larger companies with more market capitalisation are generally considered safer investments due to their higher stability and resources.
What are the types of stocks based on market cap?
There are three types of stocks based on market capitalisation:
- Large-Cap
- Mid-Cap
- Small-Cap
We’ll take you through each one in turn.
Large-cap stocks
Large-cap stocks are the stocks of companies that have a high market capitalisation, generally exceeding Rs. 20,000 crores. These companies are typically financially sound and have a long track record.
These companies are often industry leaders with a history of stability and success. Additionally, large-cap stocks may provide consistent dividend payments, which makes them a popular choice for investors seeking long-term investment opportunities.
Some examples of large-cap stocks are widely recognized companies such as Reliance Industries Limited, Tata Consultancy Services, HDFC Bank, and Infosys. These companies are usually listed on major stock exchanges like the National Stock Exchange (NSE) or the Bombay Stock Exchange (BSE).
Mid-cap stocks
Mid-cap stocks refer to stocks of companies whose market capitalisation falls between Rs. 5000 crores to Rs. 20,000 crores. While mid-cap companies are smaller than large-cap companies, they are bigger than small-cap companies. Typically, mid-cap companies have established themselves in their respective industries, are in a growth phase, and have moderate risk associated with them.
Investing in mid-cap stocks can help balance risk and potential return. Due to their smaller size and limited resources, mid-cap companies may carry a higher level of risk than large-cap companies, but they also have the potential for significant growth as they often expand into new markets and industries.
Examples of mid-cap stocks include Crompton Greaves, Polycab India, Relaxo Footwear, and Gillette India, among others.
Small-cap stocks
Small-cap stocks are stocks of companies with a relatively small market capitalisation, usually less than Rs. 5000 crores. These companies are typically in the early stages of growth and may have recently become public. Small-cap companies often operate in emerging markets or niche industries, making them riskier investments than larger, established companies.
Investing in small-cap stocks can offer significant return opportunities, as these companies have a lot of room to grow and expand. However, due to their smaller size and market presence, small-cap stocks can also be more volatile and subject to fluctuations in price.
Some examples of small-cap Indian stocks include companies like Bajaj Consumer Care, Thyrocare Technologies, and Ujjvan Financial Services, among others.
Differences between large-cap, mid-cap, and small-cap stocks
While there are differences between such stocks as a whole, these differences may not apply to every stock. For example, there may be a small-cap company which is dominant in its niche or there may be a large-cap company that has a volatile stock price.
| Feature | Large-Cap | Mid-Cap | Small-Cap |
|---|---|---|---|
|
Company Size |
Relatively Large |
Relatively Medium
|
Relatively Smaller |
|
Presence |
Usually Dominant |
Usually Established |
Usually Growing |
|
Financial Stability |
Relatively More Stable
|
Usually Less Stable Than Large-Caps |
Usually Less Stable Than Mid-Caps |
|
Risk Level |
Low |
Medium |
High |
|
Suitable Investor |
Those Looking for Steady Income from Dividends and Stable Capital Growth
|
Those Looking to Diversify Their Portfolio
|
Those Looking for Higher Growth Potential |
Frequently asked questions
Here are answers to some common questions.
-
Is it better to invest in a small-cap stock, a mid-cap stock or a large-cap stock?
This depends on your investment goal and risk appetite. As mentioned in this article, a large-cap stock is more likely to provide stable returns with lower risk while a small-cap is more likely to provide higher returns but comes with high risk. Mid-cap stocks fall somewhere in between.
-
Do large-cap companies have lower growth potential?
Usually, large-cap companies have less room to grow when compared to small-cap companies. This is because, usually, large-cap companies are already catering to the existing demand in their sector. Large-cap companies grow by diversifying their operations which can be slower than the growth experienced by small-cap companies.
-
What is the formula to calculate the market capitalisation of a specific company?
The market capitalisation of a company can be calculated by multiplying the price of each stock of the company by the number of outstanding shares of that company.
How to quickly learn about the stock market while having fun?
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Wrapping up
Learning about the different types of stocks is one of the first steps to becoming a trader or an investor. Now that you have taken that step, take your learning further by joining TradingLeagues and testing yourself against other budding traders. We hope you enjoy your stock market journey.
