Market Capitalization Definition
It’s important to understand the connection between company size, potential returns, and risk if you’re developing an investment strategy to assist you in pursuing long-term financial goals. You’ll be better equipped to create a balanced stocks market portfolio that includes a variety of “market capitalization” armed with this knowledge. Examining a company’s market capitalization is one of the finest ways to assess its value… Basically, this is determined by the overall share market value of a company’s outstanding shares. if you’re putting together a long-term investing plan. With this information, you’ll be more equipped to build a well-diversified stock portfolio with a variety of market caps.
How to calculate Market Capitalization?
A stock is evaluated in favor of focusing on its market capitalization in India, which is one of the key considerations. Investors might get clarity by understanding this evaluation method’s formula before delving into its more subtle intricacies.
Example
XYZ Ltd Company has 1 Crore shares, each with a Current Market Price of Rs.500; the Total Market Capitalization of the company is.
Total Market Capitalization = 1,00,00,000 X 500
= Rs.5,00,00,00,000
The total value of this company comes at Rs.500 Crore
Importance of Market Capitalization
Investors may have a better understanding of a company’s size and potential for growth by looking at its market capitalization, which represents its size Despite the fact that market capitalization can range from few crores to thousand of crore’s valuation, investors most frequently use the three market cap categories of small-cap, mid-cap and large-cap companies. While these categories may be useful for the shareholders, investment funds are more likely to employ them when creating a balanced portfolio for their customers that incorporates a combination of small and large companies
Categories of Market Capitalization
❖ Large Cap Companies
Companies classified as large-cap have a Market Capitalization of 20,000 Crore or More Rupees. Large-cap firms frequently have a history of timely dividend payments, steady growth, and a track record of offering high-quality goods and services.. They frequently have the Face share of the market in well-established industries, and a large portion of the country’s consumers may be familiar with their brand names. Because of this, investing in large-cap stocks could be regarded as more conservative than investing in small- or mid-cap businesses, perhaps providing less risk in exchange for a less active growth potential.
❖ Mid Cap Companies
The market capitalization of mid-cap companies are more than 5000 Crore and upto 20,000 Crore Rupees. These are usually well-established companies in fields that are experiencing or are predicted to see fast growth. These mid-sized companies can be working to boost their overall competitiveness and market share. If a company ever achieves its full potential, it may depend on this stage of development. Mid-cap equities sometimes lie between giant corporations and small caps on the risk/return spectrum. Small-caps may be more risky than mid-caps, but large-caps may have more growth potential. Going for a formal stock market courses for beginners would be a wise choice if you want to be an expert in financial markets.
❖ Small Cap Companies
The market capitalization of small-cap companies are upto 5000 Crore Rupees. These are usually young companies that offer to niche consumers or developing industries. Of the three types, small caps are regarded as the most assertive and dangerous. Smaller companies may be possibly more sensitive to a business or economic slump due to their relatively limited resources. They might also be at risk from the strong competition and unpredictability that characterizes new, developing markets. However, long-term buyers who can handle short-term, erratic stock price movements may find that small-cap companies have tremendous room for growth.
Free Float Market Capitalization
Using only the shares of a company which are actively traded on the open market, excluding those held by promoters or shares that are locked in, the free float market market capitalization method determines the market capitalization of the business. The corporation issues free shares, which are widely accessible and regularly traded in the market.
The following shareholders shares are not included:
- Promoters, founders, partners, and directors owning shares
- Shares held by hedge funds, private equity funds, or other funds
- Shares placed as collateral for loan borrowers
- Cross-holdings’ equity
- Equity owned by different trusts, none of which are regularly traded
- Others additional shares that have been locked in but aren’t being actively traded.
Formula
Free Floating Market Capitalization =
Current Market Price of Stock X (Total Number of Shares – Locked Shares)
Example:
XYZ Ltd Company has 1 Crore shares, each with a Current Market Price of Rs.500 and number of Locked Shares -20 lakh the Free Floating Market Capitalization of the company is.
Free Floating Market Cap = 500 X (1,00,00,000 – 20,00,000)
Free Float Market Cap = 400 Crore
Using Market Capitalization is share trading
It is always considered safe to start stock market investing with a large cap company, says Pravin Khetan, Founder of iPlan Education, one of India’s best stock market institutes in Delhi. He says large cap companies are more liquid and less volatile. So, there are less chances of stock manipulation. These stocks remain stable in the long term and give decent returns.
Always keep a portfolio of stocks with approximately 50% weight to large cap, 30% weight to mid cap and no more than 20% weight to small cap companies.