Fundamentally, market capitalisation refer to the actual size of the company in relation to its net value. Companies have certain outstanding shares. Outstanding shares are the total number of shares owned by stockholders, officials, and other parties in the public sector.
Total market value of these outstanding shares is Market capitalisation. Multiplying company’s outstanding shares with the current market price of each share will give you market capitalisation.
Market sort the companies into three categories:
1.) Small Cap
2.) Mid Cap
3.) Large Cap
Mega Cap and Micro Cap are also two of the categories of Market Capitalisation. However, they don’t have as much use.
Total Number Of Outstanding Shares X Price Of One Share = Market Capitalisation
For instance, there is a company XYZ Ltd,
• Total Number Of Outstanding Shares= 2,00,000
• Current Market price of each share= 2,000
• Market Capitalisation= 2,00,000*2,000= 4,000,000,00
4O Crore is the Market Capitalisation of XYZ Ltd.
LET’S COMPARE TWO COMPANIES
Suppose there are two firms: Firm A and Firm B.
• Firm A
Total Number Of Outstanding Shares: 3,00,000
Current Market Price Of Each Share:
Market Capitalisation= 3,00,000*5,000= ₹15,00,000,000
• Firm B
Total Number Of Outstanding Shares= 25,00,000
Current Market Price Of Each Share=
Market Capitalisation= 25,00,000*1000= ₹25,00,000,000
Market Capitalisation of Firm B is more than that of Firm A. But Firm B’s share price ia lower than Firm A’s. Share price doesn’t indicate market capitalisation of a company. Hence, Firm B is a much bigger company than Firm A.
How To Sort Companies Into Different Categories
There are no specific parameters to give a company a particular tag. Generally, the classification of companies is done by analysing this data.
Companies having market capitalisation of less than ₹8,500 Crore are ‘Small Cap.’
Companies having market capitalisation between ₹8,500 Crore and ₹28,000 Crore are Mid Cap.
Companies having market capitalisation of more than ₹28,000 Crore are Large Cap.
• Small Cap companies:
New start-ups and small businesses fall into this category of market capitalisation. These are the beginners who have just started and can do big in the market. Investing in these companies may prove riskier as they are new in the market. They may evolve into bigger firms in the future. There’s a strong possibility for that.
• Mid Cap companies
These are mid-sized companies that have crossed the first stage. Investing in such firms is less riskier than in Small Cap firms.
These firms have the potential to expand themselves and capture bigger share in the market.
• Large Cap companies
These are leading players in a particular sector. They have achieved big aims in the market. Large Cap companies are owned by millionaires and billionaires. They contribute significantly in the GDP of a country and in the economic growth.
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