What is Market Capitalisation?
What is Market Capitalisation?
Market capitalisation, or market cap, is a measure of a company's total value as determined by the stock market. This metric is commonly used to categorise companies by size and assess their market value. Market capitalisation helps investors understand a company's size, financial stability, and potential for growth. It is an essential indicator for making informed investment decisions.Market Capitalisation Formula
The formula to calculate market capitalisation is:Market Capitalisation= Current Stock Price * Number of Outstanding Shares
Since the market price of a company's shares fluctuates constantly, the market cap also changes accordingly. The number of outstanding shares can change over time, although this is infrequent and typically occurs due to corporate actions such as issuing additional shares, exercising employee stock options, redeeming financial instruments, or share buybacks. These adjustments can impact the market cap and thus the perceived value of the company.
Importance of Market Capitalisation
Understanding the importance of market cap can help investors make more informed and strategic investment decisions. Some of them are:- Assists in diversifying investments across companies of different sizes, balancing stability and growth potential.
- Reflects the company's market position and investor’s opinion, providing insights into market trends and economic conditions.
- Enables risk-conscious investors to adjust their portfolios by allocating investments based on the risk profiles associated with different market cap categories.
- Guides investors in aligning their investment styles (such as growth, value, or income) with suitable market cap categories that match their financial objectives.
- Facilitates global comparisons of companies across different markets, aiding international investors in identifying investment opportunities and diversifying their portfolios.
Overview of Large Cap, Mid Cap & Small Cap:
|
Type |
Market Cap |
|
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 |
Small-cap
Investing in small-cap stocks can be risky, but they may also offer higher growth opportunities.Mid-cap
Mid-cap companies are relatively stable in comparison to small cap and have substantial growth potential.Investing in mid-cap stocks is less risky than small-cap stocks but offers potentially higher returns compared to large-cap stocks.
Large-cap
Large-cap companies are stable in comparison to Mid & Small Cap and are established in the market. Investing in these companies is considered the less risky in comparison to Mid & Small Cap.
